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Supply Chain Risk

US To Register Record-Breaking Q3 GDP Increase, Much More Sober Tone In Q4, Dollar Moves Dominated By Political Risk

The latest US third-quarter GDP data will be released on Thursday following the record contraction seen for the second quarter.

ING expects a record quarterly increase, but is much less confident over the fourth-quarter outlook and any positive impact on dollar sentiment is also likely to be offset by concerns over coronavirus developments.

The overall currency-market impact is likely to be limited, especially with no implications for Fed policy and traders will remain focussed on next week’s elections.

Federal payments will boost Q3 GDP

ING notes that the third-quarter US GDP data will be boosted by pent-up demand following and easing of lockdown restrictions. The very substantial Federal payments will, however, also be a key influence.

“We cannot understate the importance of the government support for household incomes. The $1,200 cheques and the expansion of unemployment benefits that included an additional $600 per week Federal payment meant nearly 70% of recipients received higher incomes than when they were actually working.”

According to ING, residential fixed investment has also been a big growth driver with strength in the housing sector.

Consensus forecasts are for annualised growth of 32.0% while ING expects an even stronger rate.

“We are even more upbeat, looking for 34.5% annualised growth, thanks primarily to a 38% surge in consumer spending.”

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Image: US GDP

Reality check likely in the fourth quarter

“Even if we are right and the economy has indeed expanded 34.5% in 3Q, we should remember that output will still be 3.2% below that of the end of 4Q19. There is a long way to go before the economy is fully healed and unfortunately the challenges are mounting.”

ING is much more cautious over the fourth quarter, especially with increased coronavirus cases. The bank also expects that the Halloween and Thanksgiving festivals will pose major challenges to preventing a further sharp increase in cases.

“Our other major concern is that while the fourth quarter seems to have started well, fiscal support is fading with the very real prospect that income growth moves into negative territory in November and December.”

ING is currently projecting annualised growth of 4.5% for the fourth quarter which would leave the economy more than 2% below the Q4 2019 level.

“Given the potential health and economic impact of a European style spike in Covid and the prospect of weaker income growth, the risks seem increasingly skewed to the downside.”

The Federal Reserve will not adjust policy based on the GDP data.

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