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Growth Engine Remains Hot in Q2
After a strong first quarter of economic growth, market participants had high expectations for the second quarter as shuttered businesses continued to re-open with COVID-19 restrictions gradually easing. As reported by Bloomberg, forecasts for second quarter growth ranged between 6% and 11% with a median estimate of 8.4%. On the surface, the actual reported growth of 6.5% was on the lower end of the range and seemed somewhat disappointing. While the second quarter GDP was less bullish than the consensus forecast, looking through the individual components of the reports told somewhat of a different story. Notably, the bounce back in consumer demand showed continued strength as spending on goods registered a historically solid 11.6% quarterly gain.
Household consumption would likely have been even stronger in the second quarter, but COVID-19 related production issues, including labor shortages and a lack of raw materials, made it difficult for companies to keep up with the increased demand. One major factor contributing to the lower-than-expected GDP figure was a decline in inventory over the quarter. This should be a tailwind to future GDP reports, essentially shifting growth forward as the production challenges subside and inventories are eventually replenished. Optimism for growth in the second half of this year remains high, but some moderation may be warranted as challenges from spreading COVID-19 variants and persistent labor shortages may plague potential outcomes.
Additionally, the June retail sales data confirmed that consumers are transitioning from goods to service-based spending. For example, restaurant sales account for roughly 15% to 20% of service spending and grew by 2.3% over the month. Spending on travel including changing driving habits with a return to offices and re-opening of schools may be a tailwind for the service industry, potentially offsetting the fading effects of stimulus checks.
Increased consumer demand and the related inventory issues may be leading to higher than anticipated inflationary pressures. The Federal Reserve has sighted this pressure as “transitory” in nature, likely to subside as production gradually comes back online. However, the market is quick to note that as inflation continues to run hot this year, it is something the Fed will certainly need to focus on over the coming months as they look to adjust monetary policy.
Treasury Yields
| Maturity | 8/6/21 | 7/8/21 | Change |
| 3-Month | 0.044% | 0.046% | -0.002% |
| 6-Month | 0.043% | 0.048% | -0.005% |
| 1-Year | 0.066% | 0.061% | 0.005% |
| 2-Year | 0.208% | 0.194% | 0.014% |
| 3-Year | 0.407% | 0.363% | 0.045% |
| 5-Year | 0.768% | 0.742% | 0.026% |
| 10-Year | 1.297% | 1.293% | 0.004% |
| 30-Year | 1.945% | 1.927% | 0.019% |
Agency Yields
| Maturity | 8/6/21 | 7/8/21 | Change |
| 3-Month | 0.049% | 0.060% | -0.012% |
| 6-Month | 0.056% | 0.067% | -0.011% |
| 1-Year | 0.077% | 0.088% | -0.011% |
| 2-Year | 0.208% | 0.187% | 0.021% |
| 3-Year | 0.412% | 0.372% | 0.040% |
| 5-Year | 0.794% | 0.760% | 0.033% |
Commercial Paper Yields (A-1/P-1)
| Maturity | 8/6/21 | 7/8/21 | Change |
| 1-Month | 0.090% | 0.080% | 0.010% |
| 3-Month | 0.090% | 0.100% | -0.010% |
| 6-Month | 0.130% | 0.120% | 0.010% |
| 9-Month | 0.160% | 0.160% | 0.000% |
Current Economic Releases
| Data | Period | Value | |
| GDP QoQ | Q2 ’21 | 6.50% | |
| U.S. Unemployment | Jul ’21 | 5.40% | |
| ISM Manufacturing | Jul ’21 | 59.50 | |
| PPI YoY | Jul ’21 | 9.60% | |
| CPI YoY | Jul ’21 | 5.40% | |
| Fed Funds Target | August 12, 2021 | 0.00% – 0.25% |
