Markets
The United States is expected to showcase its economic strength later today, highlighting its economic exceptionalism. The preliminary report on Q3 GDP is anticipated to reveal that the largest economy in the world expanded at a pace of 4.6% in the last quarter. This figure reflects the resilience of the American consumer and a growth trend that remains robust despite the Federal Reserve’s efforts to temper inflation by engineering below-trend growth.
The Atlanta Fed‘s GDPNow model has consistently maintained a high forecast for 3Q GDP growth, projecting a substantial +5.4%. However, it’s worth noting that this model is generally less reliable early in the quarter, which may explain why consensus estimates didn’t initially place as much weight on its optimistic forecast. Over the last two months, more robust data has prompted a significant increase in the consensus GDP growth forecast for the third quarter, from +0.5% in mid-August to +4.6%.
If growth matches estimates, it’ll mean the pace of expansion was the briskest since Q4 of 2021.
I understand the reasoning behind delaying another rate hike, and it’s important to “respect the lags” in the economy. However, I cannot ignore the obvious: If the latest GDP report indicates a significant increase in personal consumption, coupled with an impressive 336,000 job additions last month and jobless claims remaining below 200,000 during October’s NFP survey week, the current monetary policy settings are not constraining the economy.
If this economic strength persists, it could prompt the Federal Reserve to delay the first rate cut further or even implement another rate hike, which could be detrimental to equity valuations but drive flows back into the dollar.
New house speaker
Rep. Mike Johnson’s (R-LA) election as Speaker of the House on October 25 has not significantly altered our view regarding the possibility of a government shutdown in Q4. While the presence of a temporary speaker introduced some uncertainty, had the November 17 deadline been reached with only a temporary speaker, it was likely that another temporary extension would have been the most probable outcome.
With a newly elected speaker in place, House Republicans will likely push for spending cuts of up to $120 billion, challenging reaching a longer-term spending deal. Additionally, differences over funding for Ukraine are expected to complicate spending negotiations further. As of now, most consider a government shutdown in November as a close call, but many corners on Wall Street are base casing a scenario that includes a shutdown of up to 2-3 weeks, which would result in a reduction of GDP growth in Q4 by approximately 0.5 percentage points, with a corresponding increase in Q1 2024.
Forex markets
G-10
During her testimony before parliament, RBA Governor Bullock did not provide explicit guidance on the near-term outlook for monetary policy. She mentioned that the recently released inflation data was “a little higher than we had been forecasting” but expressed wariness about the persistence of inflation, particularly in specific service components. She refrained from commenting on whether the data would significantly alter the RBA’s forecasts or trigger a rate hike in November.
While the latest inflation data appears to justify further tightening in Australia, the RBA has been relatively cautious compared to other central banks. There is no clear indication of a shift in the RBA’s reaction function under Governor Bullock.
Asia FX
Asian currencies are still feeling the pressure due to the volatile price movements in the US bond market. Asia’s currency weakness is driven by the robust economic data in the US and escalating geopolitical risks worldwide. The uncertainty in the global economy continues to weigh on local risk assets but is compounded by higher US yields.
While emerging markets (EM) have made progress in controlling inflation, they face increased external pressures, which translates into significant pressures on their currencies. As a result, some EM central banks have adopted a more hawkish stance to counter these challenges. For example, the Bank of Indonesia unexpectedly raised interest rates by 25 basis points in its most recent meeting.
Additionally, there is a change in the market forecast for the Central Bank in the Philippines, expecting a 50 basis points rate hike by the end of the year, effectively sacrificing some growth to slow down the currency. depreciation.
