Strong U.S. GDP Won't Derail September Rate Cut

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A strong GDP reading for the second quarter won't derail a September interest rate cut, analysts say.

Strong consumer consumption meant the U.S. economy grew faster than economists were expecting in the second quarter of the year at 2.8% annualised.

This was ahead of the consensus estimate of 2.0%. The PCE reading - which shows consumption - rose 2.9% q/q annualised, above expectation, but below the 3.7% last quarter.

"The falling personal saving rate is a key figure to note, as real disposable income growth is slowing and yet consumers are spending more. That’s hardly a sustainable route to growth," says Kyle Chapman, FX Markets Analyst at Ballinger Group. "The U.S. economic weakening trend is still intact for me."

The Federal Reserve is expected to keep interest rates unchanged next week, but the market is now fully 'priced' for a September interest rate cut.

"The recent loosening of labour market conditions and signs of slower price growth still means that there is a strong case for a cut at the following meeting in September," says Stephen Brown, Deputy Chief North America Economist.

Lately, the Federal Reserve has indicated it is becoming more concerned about the state of the job market than about inflation failing to fall back in the coming months.

"With the effects of heavy fiscal spending falling, savings being depleted, and the labour market slowing, it’s hard to see where current levels of growth can come from in the near term," says Chapman.

Ali Jaffery, an economist at CIBC Capital Markets, says, "worries about downside risks in the labour market and sufficient progress on inflation, with more shelter disinflation clearly in the pipeline, is still going to be enough to get them started with the easing cycle in September."