The U.S. economy grew at the strongest pace in nearly four years during the second quarter. Gross domestic product (GDP) – the value of all goods and services produced across the economy – increased at a 4.1% annualized rate in the second quarter.
Conference Board LEI & Business Cycles
Conference Board Leading Economic Index (LEI) data for June was released last week and showed that the LEI increased 0.5% month-over-month. The index level increased to 109.8 in June, a new cycle high. As the name of the index suggests, this composite of indicators is designed to lead the business cycle, with recent solid growth supportive of near-term economic gains and implying a business cycle still exhibiting an expansionary bias.
Broad strength across all sectors are expected for second quarter earnings season with Energy leading the way.
Rallying oil prices, strong U.S. economic data and buoyant consumer confidence have pushed analysts’ earnings estimates higher since the start of the second quarter.
The U.S.-China tariff war and the S&P 500
Equity markets continue to be conflicted between the benefits of tax reform and the turbulence of tariffs.
Contribution to S&P 500's Gain
Just four stocks have fueled over 82% of the S&P 500’s 2.6% gain on a year-to-date basis through June 30th. Excluding these stocks, the S&P 500 would only be up 0.48%. Excluding the top seven stocks, the S&P 500 would be in negative territory for the year. During an average year, the 10 stocks with the greatest impact typically account for only 45% of the market’s price moves.
US Effective Tariff Rate
The proposed tariffs - if implemented in full - would increase the average effective US tariff rate by about 5 percentage points (pp) and take the US back to levels last seen in the 1970s.
Total US Imports Affected
Counting the tariffs. So far, duties on $55.7 billion of imports have been implemented, including tariffs on washing machines and solar panels, steel and aluminum. A first round of tariffs on $34 billion of imports from China is set to take place on July 6th unless an agreement is reached. From here, President Trump has threatened three further steps: a 25% tariff on an addition $100 billion from China, 20% on $275 billion of auto imports and 10% on an additional $300 billion from China.
June - 2018 Fed Hike Probability
The Federal Open Market Committee will be announcing their next policy decision tomorrow. Another rate hike is nearly fully priced into the markets with a probability of 84%.
Evaluation of Atlanta Fed GDPNow real GDP Estimate For 2018: Q2
The Atlanta Fed’s GDPNow model forecast for second quarter economic growth remains above 4.5%. Even if the model is overestimating growth by 1%, the second quarter is staging an impressive rebound.
Economic Policy Uncertainty Remains Elevated
Politics continue to cause uncertainty and angst for the markets as they dominate the headlines. Most recently, the announcement of new governments in Italy and Spain and the implementation of steel and aluminum tariffs on some of our largest trading partners, including Canada, Mexico and the European Union.
Cumulative Rate Hikes
While the Federal Reserve is increasing interest rates in the U.S., this rate hiking cycle is set to be the longest and shallowest on record.