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U.S. economic growth accelerates in Q2 2018, Fed likely to hike rates twice more in 2018

The U.S. economy expanded in line with expectations in the second quarter. According to BEA’s advance estimate, the economy grew at an annualized rate of 4.1 percent, greatly in line with consensus expectations of 4.2 percent. A solid growth in consumer spending, business investment and exports helped drive growth in the quarter. Real personal consumer spending grew 4 percent in the quarter after rising just 0.5 percent in the prior quarter. Strength of consumption was widespread throughout goods and services.

Business investment was up 7.3 percent, which was stronger than expected. A strong rise in structures investment for the second straight quarter helped, along with a strong growth in intellectual property. Investment in mining exploration, shafts and wells was up 97 percent annualized, as drilling activity rose in response to higher oil prices. Equipment investment growth decelerated to 3.9 percent from the 9.4 percent average rate in the previous five quarters.

Moreover, fiscal stimulus was also evident in a 3.5 percent gain in federal government expenditure in the quarter. Residential investment fell 1.1 percent in the quarter, the second straight quarter of fall. Net trade contributed a full percentage point to growth in the quarter, driven by a 9.3 percent rise in exports and a paltry 0.5 percent rise in imports. Part of this strength reflected a temporary spike in soybean and core shipments to beat out the imposition of tariffs from China. This factor alone added around 1 percentage point to growth in the quarter.

Meanwhile, with much of the agriculture shipments coming out of stockpiles, a fall in inventory investment subtracted about an equal amount off growth in the quarter. Moreover, to the usual update of benchmark data, the annual comprehensive revisions this time around included a rebasing of real GDP to 2012 prices, and changes to seasonal adjustment methodology changed quarterly growth profiles by up to a full percentage point.

Looking ahead, growth is likely to stay close to a 3 percent annualized pace in the second half of the year, but an escalation in trade tensions might push that estimate down, noted TD Economics.

“Given the backward looking nature of the data, today's report is unlikely to persuade the Fed to alter its plans to gradually normalize monetary policy. We anticipate that the Fed will raise rates twice more this year, bringing the upper end of the target range to 2.5 percent in December”, added TD Economics.

At 15:00 the FxWirePro's Hourly Strength Index of US Dollar was neutral at 1.84523. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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