Q2 Surge: U.S. Economy Outpaces Expectations, Eyes on Fed's Next Move

In the second quarter of the year, the U.S. economy grew at a rate of 2.8%, considerably above the estimated 2.0% and substantially higher than in the first quarter when it experienced a 1.4% increase. This was due in large part to solid consumer demand, which helps alleviate concerns about the health of the U.S. consumer.Personal consumption contributed 2%, while rising inventories were a major factor in the growth. On Friday, the June reading of the core personal consumption expenditures price index, the U.S. Federal Reserve's preferred inflation measure, rose 0.2%, in line with expectations. Note that last year, it rose by 2.6%, slightly above expectations.

With markets fully anticipating a 0.25% rate cut by the Fed in September, the 2-10 year Treasury curve steepened to -0.15%, a level of resistance that has limited multiple steepening episodes over the past two years. Prior to Thursday's strong U.S. GDP report, investors had calculated a 20% probability that the Fed would cut rates by 0.5% at its September meeting. As those odds declined, the curve flattened back to -0.185%, although it ends the week approximately 10 basis points steeper than a week ago.

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