Markets are taking a new look at US economic performance, which seems to be out of step with the general depression in the rest of the world. Some are even talking about a “no landing” scenario, where US GDP continues to rise. But that also means inflationary pressures would remain, keeping the Fed from easing, and boosting the dollar.
On top of that is the resurgence of the Trump Trade. Opinion polls on the election which is in less than two weeks are still firmly entrenched in the margin of error. But, with former President Donald Trump taking on a slight lead in key “battleground” states over current Vice President Kamala Harris, betting odds are shifting in his favor. Investors are looking to pre-position ahead of what could be important market moves if Trump returns to the White House.
The Dollar: Up, Up, and Away?
Markets still believe that the Fed will cut rates when it meets on November 7, but the confidence in that easing has been shrinking lately. The previously expected “double” cut for either November or December has been completely forgotten. And the chances of another rate cut in December of just a quarter point are also fading.
All of that adds up to a stronger dollar, reinforcing the Trump Trade narrative, as yields have been drifting higher over the last month. Or, more specifically, since the last NFP report which showed strong hiring. Subsequent economic data points have affirmed the narrative that the US consumer remains resilient. That has helped fuel expectations that Q3 will see an acceleration of the US economy, with the Fed’s GDPNow estimate predicting 3.4%, up from 3.0% annualized in the last quarter. It could just be that the “landing” for the US economy was Q1’s 1.6% growth.
Warning Signs are Still There
But projections for Friday’s data point in a different direction. Durable goods orders are closely watched as an indicator for future economic performance, because they measure large investments done by businesses. If companies are preparing for an economic downturn, they will slow down large investments to hold capital in reserve. If this move is big enough, it can be a self-fulfilling prophecy as slower buying means lower production, and a slower economy. And vice versa.
US September Durable Goods orders are expected to swing back to negative at -0.5% from flat growth in August. But when stripping away defense (which isn’t strictly related to the economy), and transportation (which fluctuates more based on large orders for aircraft), core durable orders are expected to tick down to -0.2% from 0.5% growth in the prior month.
A Particular Point of Uncertainty
Durable goods orders could be out of line from other economic indicators because businesses are taking a bit of a pause ahead of what could be an important risk event: The election, and the surprise swing in jobs numbers. If Trump were to win, then there naturally would be an important shift in policy, and businesses might want to wait a month or so to see how that will play out.
For Forex traders, a Trump White House is seen as likely to boost the greenback, strengthening the Trump Trade even further. which means the dollar could remain upbeat as long as he gets favorability ratings in the polls. The thought is that his push for higher tariffs will translate into a comparably strong dollar in trade, and higher inflation which would keep the Fed from easing as much next year.
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