US stocks pare gains ahead of Fed statement

The Dow earlier hit a new intraday record, but has given up most of those gains as the outcome of the latest FOMC meeting looms large.

The Dow Jones rose more than 100 points when it hit a new record high of 15,634.32 earlier, as very strong ADP employment data and surprisingly large GDP growth gave stocks a lift. As the Fed’s policy statement drew nearer, those gains dwindled though, and by early afternoon in New York the Dow was up just 0.1% or 15 points at 15,536, while the broader S&P 500 rose 0.22% to 1689.6.

Macro data was bullish today, with US economic growth picking up pace in the second quarter according to official government data. GDP increased by 1.7% in the second quarter, which was substantially higher than had been expected. This was largely offset by a sizeable downward-revision to Q1 GDP though, which was slashed to 1.1% from an earlier estimate of 1.8%. A lot of the growth in GDP came from rising exports combined with government spending being cut at a smaller rate than in the first quarter (Q1 government spending decreased by 5.4%, while Q2 saw a fall of just 0.4%).

Inflation remains below the Fed’s target according to GDP price data, with the headline rate slowing to an annualised 0.7% compared to the first quarter’s rate of 1.3%. Stripping out the volatile components of food and energy leaves inflation growth of 1.1%, which is also well down on the rate seen in the first quarter.

The ADP national employment report indicates private payrolls increased by 200,000 in July, much higher than the 180,000 that had been pointed to by a Reuters poll of economists, with a big upward revision also reported for June’s data. Correlation between the ADP report and official employment data, which also includes public sector jobs, has not been very strong this year, but the strength in this report will likely raise expectations for Friday’s non-farm payrolls data nevertheless.

The Fed will be releasing its policy statement at 7pm BST. The second-quarter GDP growth will probably not affect their decision too much because of the large downward amendment to the Q1 figure, but it will be interesting to see what they make of the persistently low rate of inflation.

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