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- U.S. industrial order growth underwhelms for September.
- Just as rising import growth forces trade deficit wider again.
- Both numbers are a risk to expectations of Friday's GDP data.
A U.S. economic figures surprised on the downside for the month of September this Thursday, leading some economists to warn that Friday's third-quarter GDP number could leave financial markets disappointed.
Industrial orders of durable manufactured goods rose by 0.8% to $262.1 billion during September which, although down from the 4.4% pace of growth seen previously, was far ahead of the consensus for a contraction of -1.3%.
However, the core-durable goods orders number that excludes transportation items aircraft because of the distorting impact they have on underlying trends, grew by just 0.1% when markets had looked for growth of 0.5%
The difference between the two numbers can be explained by a pickup in transport orders, mostly aircraft. However, once defence-aircraft items are taken out of the numbers, new order levels actually fell by -0.1%.
Economists pay attention to the impact defence aircraft can have on new order flows because that expenditure is made by sovereign governments and says very little about the true health of the underlying economy.
The large ticket price of aircraft, whether defence-related or not, also means that when aerospace orders rise they can distort the picture of domestic demand.
"The 17.5% m/m fall in commercial aircraft orders wasn’t a huge surprise given the weaker orders reported by Boeing last month, but that was more than cancelled out by a 120% m/m surge in orders for defence aircraft and a 1.3% gain in motor vehicle orders," says Andrew Hunter, an economist at Capital Economics.
Separately, Census Bureau data also revealed a further deterioration of the U.S. trade balance during September, which widened to -$76 billion from -$75.5 billion in August. The shift came after imports of goods rose at a faster pace than exports of goods during the recent month.
This is significant for Friday's GDP data because of the impact that trade deficits can have on the value of economic output.
Trade balance data measures the difference in value between a nation's imports and its exports but currency markets care about it because the data provides insight into supply and demand of a currency in the "real economy", while also giving a steer on the likely pace of GDP growth.
The size and trajectory of a trade surplus or deficit is important for economic growth because imports are a subtraction in the calculation of GDP, while exports represent a credit to the value of economic output. As a result, rising exports and, or, falling imports can help boost the economy.
For currency traders, a narrowing trade deficit suggests either that exports and their associated demand for a currency are rising, or that imports and their associated supply of a currency on global markets are falling. Both are typically good for a currency while a steadily narrowing trade surplus, or a widening deficit, is a negative influence.
"Given the widening of the trade deficit and the slight disappointment in core durable goods orders and inventories, that could see expectations for tomorrow’s GDP print fall slightly," says Katherine Judge, an economist at CIBC Capital Markets.
Consensus is for the U.S. economy to have expanded at an annualised pace of 3.3% during the third-quarter, down from a multi-year high of 4.2% previously. But Thursday's data means there is a risk that this number is now too optimistic, although not everybody agrees.
"The drag on GDP growth from net exports was mostly offset by a boost from inventories, however. Wholesale inventories increased by 0.3% m/m in September, with retail inventories increasing by 0.1% m/m. Overall, we still think that third-quarter GDP growth was 3.3% annualised," says Capital Economics's Hunter.
All of the above data is important for the Dollar and global currency markets because the performance of the U.S. economy this year has been far superior to that seen elsewhere in the developed world.
The U.S. economy is on track to grow by around 3% for 2018 overall, up from the 2.2% growth seen back in 2017, while the Canadian economy has slowed just across the border. Both the Eurozone and U.K. economies have also decelerated notably and the Chinese economy was also last week shown to have begun wobbling in 2018.
That superior economic performance, brought about by President Donald Trump's tax cuts, has enabled the Federal Reserve to go on raising its interest rate at a time when other central banks have either dithered or sat on their hands.
The Federal Reserve has raised interest rates eight times since the end of 2015, and on three occasions in 2018, taking the Federal Funds rate range to between 2% and 2.25%.
Most economists say rates will rise even further over the coming quarters, so the top end of the Federal Funds rate range reaches 3.25% in 2019.
This kind of aggressive monetary policy has seen the U.S. Dollar index convert what was once a 4% first quarter loss, into a 4.29% 2018 gain during the six months or so since the middle of April.
That outperformance from the Dollar has kept all other currencies on the back foot of late so markets will watch Friday's GDP figures closely for signs of a possible change in trend being on the horizon.
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