Citi sees Fed cutting rates at each consecutive meeting staring in September

The U.S. gross domestic product (GDP) expanded at an annualized rate of 2.8% in the second quarter, which marks a massive jump from the 1.4% growth rate observed in the first quarter and much higher than the consensus of 2.0%.

"While that handily exceeded expectations, we suspect that it may be the fastest GDP growth rate we are apt to see for the foreseeable future," Wells Fargo (NYSE:WFC) economist Tim Quinlan wrote.

Citi economists highlighted a stagnation in goods consumption and a slowdown in services consumption in the second quarter compared to the first. The analysis pointed out that the trends in goods consumption have been largely moving sideways throughout this year.

In contrast, there was a note of positivity regarding business investment, which has remained strong. This was partly attributed to a significant rise in capital goods shipments, as indicated by the durable goods orders report released today. 

However, Citi's analysis also indicated a decline in both residential investment and non-residential structures investment. These sectors are expected to continue facing challenges and remain soft in the near future. 

"Overall, Fed officials will breathe some sigh of relief that final private domestic demand at 2.6% was equally as strong as in Q1," the bank's economists said.

"But we would caution against extrapolating Q2 strength to coming quarters and continue to expect a weakening labor market that will have Fed officials cutting rates at each consecutive meeting starting in September."