Markets React to Strong GDP, Soft Inflation: What It Means for Rates and Stocks

Today’s U.S. data dump delivered a dovish cocktail: hot growth, cool inflation, and soft labor. Here's what matters nowand what to watch for tomorrow.

Markets were hit with a firehose of U.S. macro data today and on the surface, it looked like a dream scenario for risk assets. Growth came in hotter than expected, inflation continued to cool, and the labor market showed early signs of loosening without flashing recession. Equities rallied, bond yields dipped, and rate cut expectations moved forward again.

But beneath the surface, there are important signals to unpack, especially ahead of tomorrow’s key wage and labor cost data, which could make or break the current “soft landing” narrative.

Key Takeaways

• Real GDP rose 3.0% in Q2 vs 2.5% expected, confirming U.S. economic resilience.

• Core PCE inflation fell to 2.5% YoY; its lowest since early 2021.

• ADP employment and jobless claims suggest labor softening but no collapse.

• Real consumer spending fell, raising concerns about Q3 momentum.

• Tomorrow’s data, especially the Employment Cost Index (ECI) is critical for validating today’s dovish interpretation.

Economic Data Breakdown – July 30

Growth: Stronger Than Expected

• Q2 GDP (QoQ):
  ➤ 3.0% actual vs 2.5% expected (prior 2.5%)

• GDP Sales (Final Domestic Demand):
  ➤ 6.3% actual vs -3.1% prior

• GDP Price Index (QoQ):
  ➤ 2.0% actual vs 2.2% expected (prior 3.8%)
  The economy accelerated in Q2, with a huge rebound in domestic demand. Yet pricing pressure within that growth fell, ideal conditions for a dovish Fed stance.

Inflation: Cooling Broadly and Clearly

• Core PCE Prices (Q2, YoY):
  ➤ 2.5% actual vs 2.4% expected, down from 3.5% prior

• PCE Prices (Q2, YoY):
  ➤ 2.1% actual vs 3.7% prior

• June Core PCE (MoM):
  ➤ 0.2% actual vs 0.3% expected

• June PCE (MoM):
  ➤ 0.1% actual vs 0.3% expected

• June PCE (YoY):
  ➤ 2.3% actual vs 2.5% expected
  Disinflation continues across both headline and core measures. The Fed’s preferred gauge; core PCE, is now within sight of target. This is the cleanest inflation print in months.

Labor Market: Early Signs of Cooling

• ADP Nonfarm Employment (Jul):
  ➤ 104K actual vs 77K expected (prior 127K)

• Initial Jobless Claims:
  ➤ 217K actual vs 222K expected

• Continuing Claims:
  ➤ 1.955M actual vs 1.960M expected

• Employment Wages (Q2):
  ➤ 0.8% actual (watch for revision)
  ADP beat on the surface, but the prior revision (127K → 104K) reveals a cooling trend. Jobless claims ticked up slightly but remain historically low. Labor is slowing gradually—not breaking.

Housing: Still in Retreat

• Pending Home Sales (MoM, Jun):
  ➤ -0.8% actual vs +0.2% expected (prior +1.8%)
  Mortgage rates remain a powerful drag. Home sales continue to fall, reflecting ongoing housing market stress.

Real Consumer Activity: Not So Hot

• Real Personal Spending (MoM, Jun):
  ➤ -0.3% actual

• Personal Income (MoM):
  ➤ -0.4% actual vs prior +0.2%

• Personal Spending (MoM):
  ➤ -0.1% actual vs prior +0.4%
  Despite strong Q2 GDP, June data hints at softening real consumer momentum heading into Q3. That could weigh on forward earnings outlooks.

What to Watch Tomorrow (July 31)

Markets will shift their focus to labor cost and wage inflation, which are central to the Fed’s inflation expectations.

Key Releases:

1. Employment Cost Index (Q2)
   ➤ Last: +1.2%, expected: ~+1.0%
   ➤ Powell tracks this closely; a surprise here could shake rate expectations.

2. Employment Wages (Q2)
   ➤ Measures underlying wage pressure; high prints raise inflation concerns.

3. Initial + Continuing Jobless Claims
   ➤ Trend confirmation of labor softening.

4. Real Personal Consumption (MoM, Jun)
   ➤ Already out at -0.3%, indicating weak real spending.

Conclusion: The Market Got Its “Soft Landing” Day, But Tomorrow Is the Real Test

Today delivered the dream mix: falling inflation, strong GDP, and softening but stable labor. That’s why stocks rallied and yields dipped.

But this rally rests on one assumption: that wage inflation and labor costs are also cooling. If tomorrow’s ECI or wages print hot, the soft landing narrative gets challenged and so does the market’s dovish positioning.

Until then, the data is saying: no recession, lower inflation, and room to cut. But stay nimble. The Fed is watching tomorrow’s numbers as closely as you are.