Making sense of a wonky GDP reading

0:02Good morning from the Financial Times. Today is Thursday, July 31st, and this is your FT News briefing. Meta's earnings comforted investors, and yesterday was a bit of a doozy for the U.S. economy. Plus, HSBC had a no-good, very-bad second quarter. HSBC can't run away from these global problems, especially these problems in its major markets, including China and Hong Kong. I'm Mark Filippino, and here's the news you need to start your day.

0:41Wall Street seems to be picking up what Mark Zuckerberg is putting down. Meta shares jumped more than 10 % right after the company reported better-than-expected second-quarter earnings yesterday. Revenues jumped 22 % last quarter. That is well above expectations. It's a sign of confidence in the CEO. As Zuckerberg doubles down on his artificial intelligence bet, he's gone on an aggressive hiring spree in the past few months, offering big bucks to lure top talent away from rivals. And the strong financial results are reassuring investors that Meta's AI ambitions will not overwhelm the company with high costs.

1:24Two very big things happened in the U.S. economy yesterday. Do me a favor and just please be patient as I break each one of them down a bit. So first, the U.S. reported GDP numbers and they were higher than expectations. The economy grew at an annualized rate of 3 % last quarter. Now that seems like a cut and dry story, but once you take a look under the hood, it gets a little bit more complicated and it impacts the second big thing that happened yesterday. The Federal Reserve met, and to no one's surprise, the central bank kept rates on hold. So what does this all tell us about the U.S. economy?

2:02Here to explain is the FT's U.S. economics correspondent, Miles McCormick. Hey, Miles. Hey, Mark. So, Miles, do me a favor. Just tell me what's going on beneath the surface when it comes to American GDP. So what's happened with these latest GDP figures is that they've been impacted quite heavily by the tariffs that Donald Trump has implemented over the last few months. In the first quarter of this year, as companies scrambled to import goods from abroad before the tariffs came into effect, imports spiked and therefore GDP slumped. In the second quarter, as imports slid because tariffs had come into effect, GDP rebounded.

2:42So you had a situation where there was a dip in GDP in the first quarter, followed by a surge in GDP in the second quarter, because this trade war and the highly unusual nature of it has fundamentally distorted the readings that we're getting on the economic front. So it sounds like, and I don't know if this is the best way to describe it, but the pendulum swung really far one way in the first quarter, and it's now swinging back in the other direction in the second quarter. That's exactly it. That's exactly it. So you had a 0.5 % contraction in the first quarter, followed by a 3 % growth figure in the second quarter.

3:20Okay, so it sounds like these quarterly GDP reports don't necessarily tell us a lot about the underlying health of the U.S. economy. So, Miles, what is a better way to interpret the GDP figures right now? In and of themselves, they can be a bit misleading. But what you can do and what Fed Chair Jay Powell suggested yesterday was focusing on the first half of the year helps smooth through the volatility in the quarterly figures. So if you average first and second quarter readings, you get a reading for the first half of the year, which comes in at about 1.1%. Recent indicators suggest that growth of economic activity has moderated.

4:00Which suggests that even in spite of the jump in GDP in the second quarter, there is an underlying slowdown occurring in the US economy. So Miles, I'm glad that you brought up the Fed, give us a little sense of how they're approaching these very different GDP numbers in the first and second quarter. Did Chair Powell have more to say about that yesterday during the meeting? So the Fed met yesterday and decided to keep rates on hold for the fifth meeting in a row. Their argument is that there's still a lot of waiting and seeing to be done. Higher tariffs have begun to show through more clearly to prices of some goods, but their overall effects on economic activity and inflation remain to be seen.

4:45So what Fed Chair Jay Powell said in his press conference following the decision's announcement was that you've got a situation where, despite this moderation in growth, the labour market still remains strong and there's still a lot that we don't know about the impact of tariffs. We believe that the current stance of monetary policy leaves us well positioned to respond in a timely way to potential economic developments. So from his point of view and from the point of view of the majority, but not all of the rate setting committee, rates should be kept on hold for the time being while the data is assessed.

5:23Miles, we've got this confusing GDP reading. We've got the Fed waiting and seeing how tariffs impact the U.S. economy. When will we have a clearer picture of how the U.S. economy is actually performing? So I think next quarter's GDP reading is going to be key in a lot of this because you're going to have moved on from the oscillation that we've seen as a result of this import spike and trough. But on top of that, there'll be data on inflation coming out. There'll be data on employment coming out, which will be watched closely by the markets and by the Federal Reserve. And Powell made it clear in his comments that there is still space for a cut in the months ahead, depending on how the data fall.

6:10Well, it sounds like something that you'll be keeping tabs on. Thanks so much, Miles. Thanks, Mark.

6:20U.S. copper prices fell off an absolute cliff yesterday. Copper traded in New York dropped by about 18%. The slide came after President Trump exempted refined materials from his 50 % tariff on the metal. Trump threatened tariffs on copper earlier this month that caused U.S. prices of the metal to jump. But now that some copper is going to be exempted, prices slid because it's less expensive than the market expected. This is all a big deal for the U.S. because half of its refined copper is imported. But, quote, semi-finished items like wires, pipes, and cable fittings will still be hit by tariffs.

7:00The White House said yesterday the levy will not stack with the ones already on cars.

7:11One of the world's largest banks took a big hit yesterday. UK-based HSBC reported that its profits were down by almost a third in the second quarter, and then its share price tumbled more than 4%. The profits hit is the latest in a slew of challenges for Europe's biggest lender. Here to explain how it happened is the FT's Asia financial correspondent, Arjun Neil-Allem. Hey, Arjun. Hi there, Mark. So tell me more about this earnings report yesterday. Give me some of the numbers. So HSBC reported its second quarter earnings on Wednesday. Profits fell by 29 % year on year. Most of that was a larger than expected hit to its profits from its stake in a Chinese lender, the Bank of Communications.

7:56Part of that was also higher than expected costs to the ongoing restructuring that George L. Hedery launched when he became CEO last year. The cost alone from restructuring and firing people was around$600 million. Arjun, were there any warning signs that this might happen, or did this catch people flat-footed? When George L. Henry became chief executive last year, he had a very clear plan that was backed by the outgoing chairman, Sir Mark Tucker, which was to pull the bank out of places where it wasn't a market leader, for example, investment banking in the US or UK, and refocus on two things, Asia and wealthy people.

8:36In those segments, HSBC did perform. So in some ways, El Hedery can say the plan is working. On the other hand, there are these other issues that aren't going to go away. The key problem is HSBC's ongoing exposure to commercial real estate in Hong Kong. HSBC is Hong Kong's largest lender, and its exposure to commercial real estate is not insignificant. So in Q2, it said that it was taking an additional provision for bad loans on the back of a still weak commercial property market in Hong Kong. Arjun, can you give me some background here about HSBC? Why should we care about its earnings and the profit hit so much?

9:19Well, HSBC is one of the largest banks in the world. It's Europe's single largest lender. and it's also one of the largest public companies in the UK. Its share price was down yesterday almost 4%, which is so significant for the UK that it dragged the whole FTSE down. Also, HSBC is a systemically important bank and so people need to pay attention to the impact of issues in China relating to property on the bank and its lending capacities. Arjun, what's your biggest takeaway from this earnings report and how it fits into the direction HSBC is headed in right now. I think my big takeaway, honestly, is it's very hard to restructure a bank like this that's so global that even if you do manage to implement a strategy that emphasizes your focus on growing wealth, growing in Asia, you're still going to be hit with curveballs like an impairment to your ownership of a stake of a Chinese bank.

10:14I think as a global bank, HSBC can't run away from these global problems, especially these problems in its major markets including China and Hong Kong. Even a new operator with a plan needs to respond to these ad hoc crises like further provisions for bad loans in Hong Kong as the property market is still in the doldrums. These are real challenges for HSBC and I guess the risk in the long term is that they don't respond to these, they aren't able to lend as much, their profitability goes down, shareholders desert the bank which will be bad for the UK, it would be bad for HSBC, and it would be bad for business globally.

10:51Arjun Neil-Allam is the FT's Asia financial correspondent. Thanks, Arjun. Thank you very much.

11:00You can read more on all these stories for free when you click the links in our show notes. This has been your daily FT News Briefing. Check back tomorrow for the latest business news.

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