GDP estimates and data on personal consumption expenditures (PCE) are two keenly awaited releases this week in the United States as the December FOMC meeting approaches when a rate hike is widely anticipated. However, the data will likely get overshadowed by the Senate debate on the Republican tax plan, where a vote could come as early as November 30.
The US dollar remains vulnerable to negative developments on the tax front but solid economic indicators should provide some support at the very least even if they don’t manage to lift the currency.
The second estimate of third quarter GDP is due on Wednesday, with an upward revision from 3.0% to 3.2% expected. The US economy has been gaining momentum this year, after growing only moderately in 2016. It is the first time since 2014 that annualized GDP growth has equalled or exceeded 3% for two consecutive quarters after growing by 3.1% in the second quarter.
Faster growth has yet to generate higher price pressures though, at least not according to the Fed’s preferred measure of inflation – the core PCE price index. While headline CPI has risen above 2% in recent months, the core PCE price index has eased from 1.9% year-on-year at the start of 2017 to 1.3% in September. It is expected to tick higher to 1.4% in October in Thursday’s data – still well below the Fed’s 2% objective.
Thursday’s PCE data will also include the latest personal income and spending figures. Personal income growth is forecast to moderate slightly from 0.4% to 0.3% month-on-month in October. Personal consumption is expected to see a sharper slowdown from 1% to 0.3%, but the drop is mainly due to the distortion seen in September when motor vehicle sales surged as a result of the damage caused by the hurricanes.
Any upside surprises to this week’s data would only reinforce expectations that the Fed will raise the fed funds rate to a target range of 1.25-1.50% when it meets on December 12-13. But with a rate hike next month already priced in and with renewed concerns about a prolonged undershoot of inflation, the longer-term path of interest rates will likely be influenced by whether or not the tax plan is passed by Congress.
Investor angst about a possible delay or watering down of the tax plan has been weighing on the dollar recently, contributing to its month-long decline against the yen and other majors. Having passed the vote in the House of Representatives, the legislation has now moved to the Senate where Republican support is proving much trickier, especially as the party’s majority is just two.
Reasons for opposition by some Republican Senators range from concerns about increasing the government deficit by $1.5 trillion over 10 years to demands for bigger tax cuts for pass-through businesses and displeasure for linking the bill with the repeal of the Obamacare individual mandate. It is thought there could be as many as 10 Republican Senators ready to oppose the bill in its current form if the Senate Budget Committee approves for the vote to go ahead on Thursday as expected.
Pressure is high on Republicans to pass the bill before the end of the year as President Trump badly needs a major legislative success for his first year in office. However, the rush to get it done before the year-end could jeopardise the tax plan by not giving lawmakers enough time to debate and improve the bill.
If the Senate postpones the vote this week or fails to pass it, the delay could add further downside pressure to the dollar, forcing a breach of the 111-yen handle. Failure to hold above 111 yen could trigger further declines towards the bottom of its 2017 range around 108 yen.
