Whattup, forex homies! Tomorrow (August 30) at 1:30 pm GMT we’ll see Uncle Sam’s second growth estimate for Q2 2017. Will it be as good as the initial reading suggested?
Here’s what you need to know about the event!
What does “preliminary” GDP mean?
The gross domestic product or GDP offers the most comprehensive snapshot of economic performance within the country, which is why is very important to both decision-makers and forex traders alike.
The Bureau of Economic Analysis (BEA) actually releases three GDP estimates: the advanced reading, the preliminary reading, and then the final reading.
The advance reading is the least accurate since it’s the earliest estimate, but it generally triggers the biggest reaction since it’s the first GDP release on the lineup.
The preliminary or second estimate then builds up on the advanced reading, as revised or more complete data come in. As for the final reading, well, it’s exactly what it says on the tin – it’s the third and complete estimate printed near the end of the third month after the quarter in question.
How did the “advanced” release fare?
Growth clocked in at 2.6% from a year earlier in Q2 2017, which is a heck of a lot better than the downwardly revised 1.2% reading in Q1.
Bureau of Economic Analysis (BEA) detailed that Q1’s downgrade reflects “downward revisions to nonresidential fixed investment, private inventory investment, residential fixed investment, and federal government spending, and an upward revision to imports.”
BEA also summed up the cause of stronger growth in Q2:
“The acceleration in real GDP growth in the second quarter reflected a smaller decrease in private inventory investment, an acceleration in PCE, and an upturn in federal government spending.
These movements were partly offset by a downturn in residential fixed investment and decelerations in exports and in nonresidential fixed investment.”
If we detail the main components, we’ll see that private consumption upped its contribution from 1.32% to 1.93%. Gross private domestic investment (-0.20% to +0.34%) and government consumption expenditure and investment (-0.11% to +0.12%) turned from drags to contributors, while net trade slipped a bit (0.22% to 0.18%) on weaker exports even as imports also dipped.
Unfortunately for the dollar, forex bulls were in no mood to pay attention to the details. All they saw was the downgrade in Q1 2017’s reading and that was enough for them to drag the currency lower near the end of the week.
What’s expected of the preliminary release?
Traders are widely expecting Q2 2017 GDP to get upgraded from 2.6% to 2.7%. If we do see an upgrade, then we’ll likely see the dollar shoot higher against its counterparts. There are other factors to consider, however.
Fortunately for Uncle Sam, preliminary releases have a tendency to surprise to the upside. As you can see on the charts below, preliminary figures have been outpacing the advanced reading AND the market’s consensus many times in the last ten years.
But there’s also the fresh trade data for June, which saw softer exports and stronger imports than factored in the advanced reading. If June’s data is taken into account, then actual exports only grew by half of the estimate used in the advanced reading while tripling the imports’ estimated growth. Yipes!
And then the POTUS himself, who is scheduled to deliver a tax reform speech in Missouri on the same day.
If he convinces market players that his tax reform plans won’t go down the same road as his healthcare and troops-in-Afghanistan pledges, then dollar traders could happily ignore the GDP estimate report in favor of trading a juicier intraday trend.
Last but not the least is the NFP week factor. If Trump’s tax speech turns out to be a dud and we see significant revisions to the GDP report, then traders could use the extra volatility as an excuse to lighten their positions ahead of the monster NFP report.
That’s it for my trading guide today! As always, remember that staying in the sidelines is an option if you’re not confident of your biases during a news event. Good luck and good trading!