US GDP in focus, Tesla's quarterly results

Today, the key macro reading is US GDP for QXNUMX. A moderately positive result (2,6%) is expected, which will mean that after a weak first half of 2022, the second one was quite decent. The strongest driver of growth has recently been private consumption. It has benefited from the fact that since mid-2022, real incomes of Americans are rising again after falling in the first half of last year.

Increase in wages, decrease in inflation

The improvement resulted from stronger wage growth, while falling inflation. In addition, there was less burden on the part of fiscal policy. It slowed down the economy, especially in the first half of last year, as the huge stimulus packages adopted during the pandemic expired. Since mid-2022, this inhibitory effect has significantly decreased, which may further support the economy.

However, there is no certainty that the US will not fall into recession in the coming quarters. After all, the Fed has raised its key interest rates by 2022 basis points since early 425, and further upward moves are to be expected. Experience shows that they have a delayed impact on the economic situation. Typically, the transmission of high interest rates to the real economy takes four to six quarters, so the worst months are still ahead for the Americans.

Many leading indicators are already signaling problems. The money supply (M2) is no longer increasing. In addition, the tightening of monetary policy has now been reflected in the tightening of credit conditions for companies, which should dampen the propensity of companies to invest. The deterioration is already visible in business sentiment. Both the ISM for industry and services are below the neutral level of 50 points. In the past, the rate for the latter category has been this low almost exclusively in times of recession.

However, the deterioration in financing conditions has not yet been reflected in hard data. It only broke down housing. However, the fact that this particularly interest rate-sensitive sector is the first to come under pressure is a classic cyclical pattern. The decrease in the number of building permits is gradually resembling that observed in the period preceding the previous economic troughs.

Leveling demand fluctuations

Also US bond market is pointing to a recession. The yield curve is still inverted and this is the picture we have had since July 2022. In the past, this was an effective indicator of an impending collapse.

Recession largely depends on the labor market. If employment growth slows down significantly, then wages will stop growing and, as a consequence, private consumption will fall drastically. So far, neither monthly nor weekly data from the labor market send any major signals, although NFP reports are successively at lower and lower levels. It is also worth looking at the number of temporary workers in the US, which is has been falling for five months. They are used by companies to compensate for fluctuations in demand. This number is quite sensitive to the economic cycle, so the data warrants caution.

Expected economic growth in the fourth quarter in the US will not mean that the US will avoid recession. Some leading indicators are already showing a decline, and let us remember that the full impact of high interest rates has not materialized yet. Monthly retail sales and industrial production disappointed last week. However, the Fed will likely need more evidence to change its restrictive stance.

Tesla quarterly results

After session yesterday Tesla reported quarterly results. Stocks in aftermarket trading rose nearly 6 percent. Revenues amounted to USD 24,32 billion (expected USD 24,16 billion) and earnings per share were USD 1,19 (forecasts indicated USD 1,13). Elon Musk announced that the company will be able to produce 2 million vehicles this year. There are plans to expand the plant in Nevada. The Nasdaq 100 opened with a bearish gap yesterday. In the following trading hours, however, he managed to close it and the quotations returned above 11.800 points. Ultimately, the tech index lost 0,27 percent. The negative start of yesterday's session to some extent illustrates investors' fears about the decline in revenues of Wall Street companies.

Today in the morning the main currency pair is testing local highs, which means that the dollar weakens again. The exchange rate is again around 1,0930. In case the US GDP disappoints, then further USD depreciation will continue and thus EUR / USD quotations have a chance to definitely approach the level of 1,10.

Source: Łukasz Zembik, OANDA TMS Brokers