The Atlanta Fed’s GDPNow estimate for the second quarter has slightly dropped to 3.5%, down from 3.8%. This change follows new data from various US government agencies. Forecasts for second-quarter personal consumption and government spending have decreased to 1.9% and 2.1%, respectively. On the other hand, growth in real gross private domestic investment has slightly improved, moving from -1.9% to -1.4%. The next update for these projections is expected tomorrow. Even with some economic uncertainty, there are no clear signs of major issues. The reduction in the Atlanta Fed’s estimate indicates lower expectations for consumer and government spending. However, the decline in fixed investment is not as steep as previously thought. In simpler terms, lower consumer spending means goods and services are moving more slowly, which often leads to lower earnings expectations for retail and service companies. Additionally, a decrease in government spending can impact publicly funded projects and grants, which, while not game-changers on their own, can affect overall sentiment when paired with other weak indicators. Investment is still shrinking, but it seems to be stabilizing. This is a positive sign. A shift from a larger drop to a smaller one suggests businesses are not cutting back as much on buying equipment, building structures, or managing inventories. This may mean the economy is slowing down instead of heading for a downturn. Traders and futures desks will want to factor this into their models more carefully. From our perspective, this points to a softer economic environment than many expected a few months ago. While volatility remains high in some areas, immediate concerns like runaway inflation and emergency tightening have eased. The nature of the downgrade shows that growth is slowing, but in an orderly fashion. Bonds have responded with mixed reactions but not erratically. For those of us focused on rates, it’s important to watch how quickly consumer and government figures change tomorrow. If either sees further cuts, there could be short-term opportunities in rate reaction trades or steepening the yield curve. What matters now is shifting focus away from excessive downside hedges and thinking about what level of GDP growth would again warrant a defensive stance. So far, the overall data trends do not show significant deterioration, supporting tighter bid-offer spreads and slightly lower risk premiums for shorter maturities. We should remain alert for any upward revisions in investment. If such changes persist, they could provide insights into where businesses are spotting demand that may not yet be reflected in consumption data. Any changes in tomorrow’s report will need context. A half-point change in the model estimate isn’t the main concern; it’s which component shifts and under what circumstances. Look for patterns, not exaggerations.

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