The advance estimate of third quarter GDP growth in the US will be released tomorrow at 1230 GMT with forecasts projecting a slowdown from the second quarter’s 3.1% expansion on an annualized basis to 2.5%. Economic activity, as reflected by the rise in Gross Domestic Product, grew by 1.2% in the first quarter of the year.
Expectations for slower growth relative to the preceding quarter are in large part based on the fact that the world’s largest economy suffered the negative effects of devastating hurricanes storming its soil during the third quarter of the year.
Still, should expectations materialize, annualized growth in the order of 2.5% is a "decent" figure given the recent history of GDP releases in the US (see five-year history below). Also, one should not forget that major natural disasters have a tendency to only temporarily act as a detriment to growth, failing to hamper economic activity in the longer-term. Not only that, but activity in quarters following a natural disaster is likely to accelerate as the public and private sector enters into "restoration mode", increasing spending.
Yesterday’s upbeat figures on durable goods orders for the month of September pointed to robust business investment, spurring hopes that the impact on the economy from the hurricanes will not be as detrimental as some have initially feared. Further adding to positive sentiment where numbers on new home sales for the same month which rose to a near 10-year high, growing by double digits on a monthly basis and storming past projections for a mild contraction in sales. It should be mentioned however, that other indicators on housing activity have not been as strong.
Should numbers on economic activity indeed surprise to the upside, then they would likely serve as a fresh catalyst for the US currency to gain. Dollar/yen yesterday rose to the three-and-a-half-month high of 114.24 before retreating to finish the day lower by a bit more than 0.1%. A data beat is likely to see the pair challenging the aforementioned high which might act as resistance to the upside.
On the way down, the area around the 113 handle was fairly congested recently and could be of significance, providing support should activity slow down by more than analysts project. Further below the pair would eye the current level of the 200-day moving average at 111.73 as another potentially important mark. Notice that the area around this level also encapsulates the one-month low of 111.64 that was recorded on October 16.
Further ahead, themes driving economic growth in the US are the Trump administration’s ability to deliver on key legislation, with tax reform efforts dominating attention in recent weeks, as well the interest rate environment further ahead. Last week, Senate Republicans passed a crucial budget resolution for fiscal-year 2018, taking a big step on the way to tax reform as they now have the "luxury" to pass a tax bill without Democratic support. However, Republican infighting this week suggests that a tax push is far from a done deal. Regarding the future path of interest rates, indications have been that President Trump will announce his Fed chair pick before his trip to Asia on November 3. The latest reports point to Republicans favoring Stanford University economist John Taylor, a perceived inflation-hawk favoring higher rates. The US President has recently said that the top three contenders are current Fed chief Janet Yellen, Fed Board of Governors member Jerome Powell and John Taylor. The former two are viewed as dovish options by the markets.
