U.S. Q2 GDP: Good (If It’s True)

At 4%, U.S. real GDP made an impressive comeback in the second quarter relative to Q1. Of course, just like previous readings, this data is subject to revision.


To the extent that data covering the past quarter matters for markets, investors should note that today’s GDP release is a preliminary estimate, subject to two revisions over the next several weeks. The Q2 data was healthy and shows that the economy has decent momentum going into the second half of the year.

However, there were revisions to the GDP data for the past three years that show that U.S. growth was even weaker than previously reported in 2011 and 2012. The average growth rate from 2011 to 2013 was revised down from 2.2% to 2%.

Despite our reservations about the GDP data, we are not surprised by the 4% Q2 print. As mentioned in previous Insights, there is plenty of evidence that the U.S. economy is gaining momentum. Survey data of the manufacturing sector, the budding strength of the jobs market and the lack of headwinds compared to previous years of the recovery all suggest that a period of above trend growth should persist.

Importantly, the Q2 GDP data will no doubt be scrutinized at the FOMC meeting today. If anything, the Fed may conclude that the output gap is slightly larger based on the downward revisions to GDP in previous years. The offset to this is that more recent data suggests the current momentum is somewhat stronger than previously believed and could surprise further to the upside. On balance, we doubt that today’s data will trigger a change in the Fed’s dovish rhetoric. Nonetheless, improving data, especially on the consumer side, does serve as a warning that the long era of ultra accommodative monetary policy is nearing an end.

Will USD/JPY Finally Break?

USD/JPY has been frustratingly stable but our bias is to expect it to break lower:


  • The BoJ kept policy on hold last week and gave no indication that it is about to increase its asset purchases.
  • Valuations are stretched. Our PPP model says that USD/JPY is overvalued by more than 20%
  • Positioning and sentiment indicators show excessive pessimism towards the yen. Long Nikkei/short yen trades have made no money for investors over the past year. Investors may be losing patience with this trade and may cut their positions at the first signs of trouble. This could cause a cascading effect as stop-losses get triggered, leading to further selling.

Bottom Line: Fundamentals and technicals point to a downside break in USD/JPY. Also, as last week’s events in Ukraine/Russia highlight, global risk aversion can spike without warning. Shorting USD/JPY serves as a valuable hedge to portfolios.