Three reasons to expect a US Dollar-boosting outcome

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  • Economists expect the United States to report an annual growth rate of 2.8% in the last quarter of 2022.
  • Better gross domestic product estimates from the Atlanta Fed, lower inflation and Chinese exports could lead to a surprise.
  • The US dollar would rise in response to a faster pace of expansion.

Recession, what recession? Recession fears have dominated headlines in recent weeks, and the forthcoming gross domestic product (GDP) report, due out at 1:30pm GMT on Thursday, will put a stop to those talks. But how much has the US economy grown in the past quarter? That is the crucial question for markets.

Economists expect the first release of manufacturing data for the final quarter of 2022 to show annualized growth of 2.8%, slower than the 3.2% clip recorded in the three months ending September. There are three reasons to expect a better result.

1) Estimates from the Atlanta Fed paint a rosier picture

The Atlanta branch of the Federal Reserve (Fed) provides timely growth estimates based on incoming data. The final pre-publication figure of GDP was 3.5%.

Source: Atlanta Fed

Not only is it substantially higher than what the economic calendar shows, but it also points to an acceleration. The bank’s GDPNow model has become refined and more accurate over the years. It’s hard to imagine there’s such a big difference.

2) Falling inflation

The Fed’s rate hikes are working – and so are supply chain improvements and savvy consumers. The aggregate consumer price index (CPI) fell from an annual peak of 9.1% in June to 6.5% in December. A substantial portion of that slowdown occurred in the final months of 2022.

Gross domestic product refers to real output – the US dollar-based product minus the effect of inflation. With slower price increases, the increase in real GDP is higher. While forecasters have taken that into account, they still expect the GDP price index to come in at 3.2% – which seems too high, especially after the overall CPI fell in December.

Methodologies for CPI and GDP inflation statistics are different, but there is room for a downward surprise in the Price Index – thus an upward surprise in real GDP.

Source: FXStreet

3) The Chinese effect

The world’s second-largest economy is China, and its zero-covid policy limited economic activity and contributed to declining inflation. Beijing, however, dismantled restrictions related to the virus and went further by loosening its grip on the real estate and technology sectors.

The moves took place in mid-November and proceeded at a staggering clip. I doubt economists have fully considered the impact of the reopening on the US economy. It could deliver an upside surprise, especially in the export component of GDP.

While the United States has a trade deficit with China, a small increase in exports to the Asian giant could boost GDP.

US dollar could rise, stocks could fall on strong gross domestic product

An economy that is getting stronger is one where prices could rise faster – and inflation is the focus of the Federal Reserve. In addition, such a robust economy can absorb higher interest rates.

A stronger GDP could trigger a rebound in the US dollar and weaken equities, which need lower borrowing costs to thrive. The reaction could be amplified by the Fed’s blackout period, during which officials refrained from speaking ahead of its decision. The Federal Reserve will raise interest rates by 25 basis points next week.

Final thoughts

The first release of GDP has historically had an excessive impact on markets. Over the past year, investors have reacted strongly to every economic indicator, implying substantial volatility in response to this release.

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