Fundamental Fun with Orbex – US Q3 GDP

Traders are going to be looking very closely at the release of the latest GDP data from the US, which is scheduled for release 8:30 EST (14:30 CET) on Friday. It’s “advance” data, meaning that this is the first reading and could be slightly tweaked in the two later releases before we get the final official number. But since this is the first look at the data for the quarter, this is the one that has the most impact on the markets.

There are some other complementary data released at the same time, which could cause an impact on USD pairs and US indices. Here are some things that traders might be thinking about, and what we might expect from the data.

Third Quarter Annualized Gross Domestic Product

Last quarter’s GDP came in pretty high at an annualized 4.2%, which was in line with expectations but was also the best performance since 2014. Not only that, but performance above 4% in the US economy is relatively rare: this was the fifth time in over ten years. Previously when the US economy managed that kind of performance, the growth dropped off for the next quarter.

There are several factors why that level of growth might not be repeated this quarter: the growth rate last quarter was extraordinary because of the impacts from the tax cuts (which are not going to repeat this quarter), and contribution from trade just ahead of the tariffs. Consequently, the current expectations are for an annualized growth rate of 3.3%.

A dip in growth is already priced into the markets, but some of the components of the data are likely to get extra attention, particularly the trade numbers. Q3 is the first full quarter measuring the impact of the US-China trade dispute, and analysts are going to be really keen to see the total, real, cumulative effect on trade.

The other factor that is relevant to keep an eye on are inventories; typically, the harbinger of a recession. Inventories marked a significant low last quarter, so, while a recession is not on the horizon, increasing inventories are a running tracking number for analysts, and they are an indication of a drop off in sales – which combined with relative lackluster performance in corporate earnings to date, might give some impetus to the bears.

Personal Consumption Expenditures

This is the average amount of money that consumers spend and is a key indicator of inflation. Consumer spending for the last couple of quarters has maintained at the highs for the last eight-ish years. About half of the GDP growth last quarter was driven by personal consumption. This is going to be a key component this time around, with a consensus expectation of a growth of 2.0% against last quarter’s 2.1%.

PCE is tied closely to inflation, as more consumer demand typically translates into higher prices, and it is the PCE deflated CPI that the Fed tracks for monetary policy. While generally higher PCE means that the economy is doing well and should signal dollar strength, there is the factor that if it significantly underperforms, it could mean the Fed might hold off on the next rate hike – at least that’s what the stock bulls are hoping.

Some of the thinking behind the numbers

Many analysts have pointed towards the Fed’s tightening of the monetary policy as having a dampening effect on the economy, and a miss on the expectations for GDP and PCE might give some hope that the FOMC will be deterred from their next rate hike (already taking the unprecedented move of hiking in September).

October is sometimes seen as a pessimistic month, given the history of economic troubles starting at the end of the month, as the economy rolls from a productive summer footing to a more constrained outlook over the winter months. Consumer spending in the lead-up to Christmas gets more attention, with many retailers banking on sales during the next couple of months to stay afloat.

Another factor that will be on trader’s minds is politics: The US is heading into midterm elections, with President Trump’s approval ratings and therefore the size of his coattails, based on economic performance. While a switch of at least the House to Democrat control is largely priced in, the relative uncertainty of a change in political position in the US could make some hold off on investment until that is resolved.

Energy prices have also been impacting trading, pushing up the cost of transportation and logistics, and weighing on corporate profits and by extension on the economy. Another factor is Trump’s recent announcement to curtail government spending to try and reduce the deficit. In short, higher economic growth will be more of a surprise than lower growth – after all, the sliding in stock indices in the lead up to the data is showing a market pricing in worse economic performance in the near term.