Tomorrow at 12:30 pm GMT the U.S. Bureau of Economic Analysis (BEA) will publish the first estimate of Uncle Sam’s growth for Q3 2016. Are you ready to trade the report? Here’s a little Q&A for those who are planning on trading the event:
Why is the GDP important?
The gross domestic product (GDP) is the measure of economic activity in a country. Central banks usually take cues from GDP reports to see if the economy is in need of more monetary stimulus. In the Fed’s case, a strong GDP would add more pressure to raise its interest rates this year.
The BEA releases three GDP estimates: the (1) advanced reading, (2) preliminary reading, and the (3) final reading. The advanced reading is the least accurate and is often subject to revision, but it provides the earliest look at how the U.S. economy is faring, so it tends to trigger the biggest reaction.
How did Q2 2016’s advanced reading turn out?
Two words: epic fail. The initial GDP estimates came in at 1.2%, which was less than half the 2.6% growth that market players were expecting.
Turns out, analysts seriously underestimated the declines in private domestic investment and government spending. The former fell by 3.3% and shaved off 1.68% from the GDP, while the latter slipped by 0.9% and subtracted 0.16% from the numbers.
Luckily, consumer spending rocketed by 4.2% during the quarter and added 2.83% to GDP growth while the net trade contributed 0.23% after exports expanded by 1.4% and imports contracted by 0.6%.
As expected, dollar bears went wild at the wide miss. USD/JPY fell by another 1.36% despite already sustaining damage from the BOJ’s policy changes earlier in the day while USD/CAD also fell by 1.28% before hitting an intraday low.
What’s expected for Q3 2016’s advanced reading?
Forex geeks are expecting growth to come in at 2.5% in Q3 2016, higher than last quarter’s 1.2% uptick, while annualized growth is expected to slip from 2.3% to 1.4%. Thing is, some aren’t convinced that we’ll see such a strong recovery for the economy.
For starters, the Fed explicitly said in its last meeting minutes that “consumer spending appeared to have moderated somewhat in the third quarter from its rapid second-quarter pace.” This is after they’ve admitted that household spending will be “a primary contributor to economic growth going forward.”
Even leading indicators are painting a mixed picture. While consumer spending and sentiment continued to show upside surprises, retail sales has also missed its market estimates in last few months. Business PMIs have also showed weaknesses, which point to even lower private investment for the quarter. Trade activities look promising though, with exports recently hitting its highest levels in 13 months and imports showing more subdued growth.
Historically, it’s also not looking good for this week’s GDP release. As you can see on the chart below, the initial Q3 GDP report has a pretty good track record in coming in higher than consensus. However, the tides have changed in the last four (including Q4 2015) releases where we saw mostly misses in the actual figures.
Unless we see significant improvement in government spending AND trade activity continued to improve in September, it’s unlikely that this quarter’s release will meet its expectations. But before you sell the dollar like there’s no tomorrow, you should also take note that advanced Q3 reports tend to get HIGHER final figures, a teeny info that could keep some of the bears away.
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