The U.K. ain’t the only one that’s releasing its GDP report this week, since the U.S. will also be releasing the advanced estimate of its Q4 2016 GDP this Friday (January 27, 1:30 pm GMT).
So if you’re looking for a non-Trump catalyst that has a high chance of injecting the Greenback with some volatility, then this is your best bet. And if you’re planning to trade this top-tier economic report, then you better gear-up by reading up on today’s Forex Preview.
Oh, for the newbies out there, you probably already know that the GDP report is about after reading up on my earlier write-up for the U.K.’s GDP report. In the case of the U.S., its GDP reports come in three:
- the first or advanced estimate
- the second or preliminary estimate
- the third and final estimate
The final estimate is the most accurate while the advanced estimate is the least accurate. In addition, the advanced estimate is subject to revision as new data comes to light.
However, the advanced estimate gives us a first glimpse of how the U.S. economy is doing as a whole, so it’s important to both forex traders and decision-makers alike. As such, it usually triggers a reaction upon release. Okay, on with the show!
How did the Greenback react to Q3 2016’s advanced estimate?
The advanced estimate for Q3 2016’s GDP growth was released on October 28. And it was a pleasant surprise because it came in at a 2.9% annualized quarter-on-quarter rate of expansion, which is faster than Q2’s upwardly revised +1.4% pace (revised higher from 1.1%).
Not only that, Q3’s reading was the best reading in eight quarters. In addition, quarter-on-quarter GDP growth has to accelerate for two straight quarters. Year-on-year, Q3 GDP grew by 1.5%, which is faster than Q2’s 1.3% pace.
That’s a pleasant reading after Q2 printed the weakest annual growth rate since Q2 2013. Moreover, Q3’s reading puts an end to five consecutive quarters of ever slowing growth.
Looking at the details of the GDP report, consumer spending, otherwise known as personal consumption expenditure, was the main driver of growth, adding 1.47% to annualized quarter-on-quarter GDP growth.
But the main reasons for the accelerated growth rate were the larger contribution from net trade (+0.83% vs. +0.18% previous) and the business investment finally adding 0.52% to growth after being a drag during the past three quarters.
Overall, the advanced Q3 GDP report was pretty good, so the initial reaction was to try and buy up the Greenback.
However, the GDP report was released just under two weeks before the 2016 U.S. presidential elections.
And at the time, Trump was gaining against Hillary Clinton in the polls, thanks to Wikileaks releasing a string of emails related to eyebrow-raising activities by the Clinton Campaign.
You see, the media narrative at the time was that a Trump presidency was going to be a complete disaster not just for the U.S. economy, but for the entire planet.
Therefore, the news that Trump was gaining ground against Clinton was considered a bad thing back then, and so market players were likely wary of loading up on the Greenback.
And things only worsened (for the Greenback and Clinton) when FBI Director Comey later announced that he was re-opening the email scandal investigation on Clinton.
How did the final reading for Q3 2016 GDP end up?
The +2.9% advanced estimate for Q3 2016 GDP was already pretty good, but it was further upgraded to +3.2% for the preliminary estimate before getting further upgraded to +3.5% for the final estimate.
And the main reason for the final upgrade was that the contribution from consumer spending was bigger than originally estimated (+2.03% final vs. +1.47% advanced).
What’s expected for Q4 2016’s GDP estimate?
The general consensus among economists is that Q4 GDP expanded by an annualized quarter-on-quarter pace of 2.2%, which is obviously slower than Q3’s upwardly revised reading of 3.5%.
A slower growth rate sounds about right. Retail sales picked up during the Q4 months, so consumer spending was likely strong. However, trade was rather disappointing.
And as I noted earlier, trade was a major driver for the faster rate of expansion in Q3. Heck, the minutes of the December FOMC meeting even revealed that Fed officials were concerned that “available trade data suggested that real net exports would make a negative contribution to real U.S. GDP growth in the fourth quarter.”
And only the trade report for October was available back then. Presently, we also have the trade report for November, and it ain’t pretty, since November’s trade deficit of $45.24 billion is the biggest trade gap in nine months.
Looking at some of the publicly available GDP forecasts from other institutions, the Atlanta Fed’s GDPNow is forecasting a GDP growth of 2.8% as of January 19, which is a faster pace than the consensus reading, but still slower than Q3’s reading.
Meanwhile, the New York Fed’s NowCast is forecasting a 2.1% pace of expansion as of January 20, which is a tick slower than consensus. As for Moody’s Analytics, it’s forecasting a 2.4% pace of growth, which is a bit faster than consensus.
Overall, the available economic reports are pointing to a downturn in trade. And since the trade was a major growth driver back in Q3, the poor readings for trade will likely weaken GDP growth, so the consensus reading looks about right.
As usual, a better-than-expected reading usually triggers a quick rally while a miss generally causes a quick selloff. However, just note that presently, the market has a more forward-looking attitude towards the U.S. economy and the Greenback.
And most of that is based on what The Donald has to say or does, so follow-through buying or selling based on the GDP report is not likely unless the actual reading beats consensus by a lot, or the miss is a yuuuuge one, or the details are really disappointing.