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Analysts at Nomura have raised their Q2 real GDP tracking estimate by 0.1pp to 3.5% q-o-q saar.  

Key Quotes:

“GDP tracking update: Incoming data on the advance goods trade balance suggest a narrower-than-expected goods trade balance for April. Moreover, in the BEA’s second estimate of GDP, inventory investment came in weaker than we expected. This implies more of an increase in inventory investment in Q2. Thus, we raised our Q2 real GDP tracking estimate by 0.1pp to 3.5% q-o-q saar.”

“The BEA lowered Q1 real GDP to 2.2% q-o-q saar (Nomura: 2.1%, Consensus: 2.3%), from the previously reported 2.3% q-o-q saar. Personal consumption expenditure (PCE) was lowered by 0.1pp to 1.0%, reaffirming the relative weakness in Q1. Yet, we think PCE will pick up in Q2 as consumer fundamentals remain healthy. The downward revision was likely just a reflection of new data on spending on services as reported in the advance Quarterly Services Survey. Moreover, residential investment was revised down. This appears consistent with weaker-thanexpected incoming data on residential construction following a strong increase in Q4, which was boosted by hurricane recovery.”

“On the bright side, growth in business fixed investment was strong. Investment was revised up for both structures and equipment, suggesting stronger momentum in Q1. Investment in intellectual property was revised up notably, reflecting the data from the Quarterly Services Survey. Despite the relatively soft Q1 GDP estimate, the details suggest that the economic momentum remained intact and growth will pick up in Q2. In line with our view, the May FOMC meeting minutes reiterated that both accommodative financial conditions and fiscal policy are expected to support growth despite a number of uncertainties.”

“Core PCE inflation for Q1 was revised down to an annualized q-o-q change of 2.3% (2.29%), from 2.5% (2.47%). On a y-o-y basis, core PCE inflation was lowered to 1.6% (1.617%), from 1.7% (1.661%) in Q1. It appears that the primary source of the downward revision to core PCE inflation was financial services without payments (imputed financial services). The growth in this measure was lowered to 1.9% q-o-q ar, from the previous estimate of 5.0%. At the moment, it is unclear what prompted the BEA to revise down this index. Given that the recent pick-up in financial services prices was a factor pushing up core inflation, the downward revision appears slightly negative to our inflation outlook but only marginally so. For April core PCE inflation estimates which are scheduled to be released tomorrow, we maintain our forecast of 0.132% m-o-m. However, on a y-o-y basis, today’s data pose some downside risk to our projection of 1.83%.”