The US will issue preliminary GDP growth figures for the third quarter on Friday at 1230 GMT and markets will take a very close look at the data which will be the latest evidence on how well the world’s biggest economy performed before midterm congressional elections take place on November 6. While the consensus is for a slower pace of expansion, a steeper deceleration than expected is needed to persuade investors that Trump’s administration 3.0% growth goal for 2018 is unrealistic.
According to analysts, US GDP growth in the three months to September eased to 3.3% in annualised terms after hitting 4.2% in Q2, the fastest rate recorded in four years and almost twice the 2.2% pace it printed in Q1. Even if forecasts prove accurate on Friday, such an expansion is still a healthy one as long as it is bigger than 2.0% and smaller than 4.0% which economists consider an optimal range for GDP growth.
Income tax cuts applied to businesses and consumers in December 2017 are likely aiding the economy to get larger quicker, with average hourly earnings surging by 2.9% y/y in August, the fastest increase since 2009 and the unemployment rate dropping to 3.7% in October, to the lowest since 1969. Inflation as gauged by the core PCE price index finally reached the Fed’s 2.0% y/y price target in July and remained at that level in August, while real wages held in the positive territory, supporting household spending. Indeed, growth in personal consumption expenditures is forecasted to have stood solid at 3.5% in annualised terms in the third quarter, slightly below the 3.8% rise seen in Q2. At the same time, the Conference Board Consumer Confidence Index hit an 18-year high in September, flagging further buying interest in the coming months.
Meanwhile, on the business front, economic indicators look to be in good shape as well, despite US tariffs restricting access to inputs and Chinese countermeasures reducing demand for US products. The ISM manufacturing PMI jumped to the highest mark in 14 years in August before inching down in September, while in the services sector, the corresponding index spiked to an all-time high in September. Yet survey participants, especially in supply chains, were overwhelmingly worried that US trade protectionism could constrain investments and weigh on economic growth in the coming years. Something strongly evident from the recent sell-off in global stock markets, as well as from the US trade deficit which widened for the fourth consecutive month in August. However, with a new NAFTA deal settled between the US, and its closest trade partners Canada and Mexico (after China), trade terms might return in subsequent years. Yet the new agreement might not take effect until 2020 as the new accord needs to pass from legislator bodies in each of the three nations.
In FX markets, USD/JPY slipped to a more than a week low of 111.81 early on Thursday before reversing back above the 112 level. An upbeat GDP growth report on Friday would boost confidence in the US economy and more importantly provide a helpful hand to Trump’s Republicans in the midterm elections which currently. Under this scenario, the dollar may retest the recent peaks between 112.73 and 112.87, while if these fail to hold, traders could look for resistance in the 113.12-113.38 area, identified by the highs on September 26 and October 9 respectively.
Otherwise, a bigger slowdown than anticipated could raise speculation that the US economy has reached its peak and the Fed, which plans to hike rates at least four times until year-end 2019, may use a more careful rate guidance in the coming policy meetings. As such, the pair could move back down to 111.81, before the 111.61 level on October 15 comes into view. A decisive close beneath that bottom would signal a resumption of this month’s downtrend from 114.54, turning the market from neutral to bearish again. In this case, support could run towards 111.47 – a strong barrier during August. If the price manages to pierce that level too, the next stop could be around the 111.00 psychological level.
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