Will US GDP Revisions for Q3 Cool December Fed Rate Cut Expectations?

[B]NOV 29[/B]
[B]US[/B][B] GDP Annualized (3Q P) (13:30 GMT; 08:30 EST)[/B]
[B]New Home Sales (OCT) (15:00 GMT; 10:00 EST)[/B]

                                   [B]Expected:                            4.9%[/B]
                                   [B]Expected:                           750K[/B]
                                   [B]Previous:                             3.9%[/B]
                                   [B]Previous:                            770K[/B]

[B]How Will The Markets React?[/B]
The US dollar, equity markets, and Treasury yields could stand to gain as annualized GDP for Q3 is expected to be revised higher on Thursday. Indeed, initial estimates were already strong and showed that expansion accelerated 3.9 percent from 3.8 percent in Q2, as exports, consumption, and business investment picked up the slack of a collapsing home construction sector. This time around, Q3 GDP is forecasted to be revised to a four-year high of 4.9 percent as the US trade deficit unexpectedly narrowed in September amidst broad weakness in the dollar and record export demand. However, personal consumption is forecasted to be revised down to 2.8 percent from 3.0 percent, which may serve as a reminder that the American consumer – who fuels two-thirds of the economy – faces major hurdles in Q4 as record high gas prices, falling home values, and a shake-up in the financial markets plagues sentiment. In fact, according to a Bloomberg News poll of economists, the median estimate for Q4 GDP is 1.5 percent, and even that figure may be a bit lofty. Retail sales growth at the start of Q4 was a tepid 0.2 percent – down from 0.7 percent in September – while expectations for the holiday shopping season are broadly mixed. According to ShopperTrak, Black Friday spending rose as more shoppers ventured out to take advantage of store promotions and massive discounting. However, sales per customer were actually lower, suggesting that there will be little momentum to carry the pick up in sales into December. Nevertheless, the markets may opt to live in the moment on Thursday and take strong Q3 GDP revisions as a sign that the economy will be better equipped to handle the tightening of the credit markets and downfall in housing, leaving potential for US equities, Treasury yields, and the greenback to gain in the near-term.
Will Thursday’s US data shift FOMC rate cut expectations for December? Discuss the topic in the DailyFX Fed Watch Forum.
[B]Bonds – 10-Year Treasury Note Futures[/B]
Treasuries remain contained to a clear ascending channel, though price has continued to back off from the highs of 114-31 as the markets become more comfortable taking on risk. Nevertheless, economic data on Wednesday may help keep the trend intact, as dour durable goods and housing reports could underpin the case for a Fed rate cut in December. On the other hand, Thursday’s release of US Q3 GDP may only reverse gains for the contract. A bearish break below support at 113-15 targets 112.

Since EUR/USD hit an all-time high of 1.4967 last Friday, many traders have been left wondering whether the pair has topped out or if a more substantial test of 1.50 is in store. Wednesday’s US event risk may bring gloomy news to the forefront once again as durable goods orders and existing home sales are expected to be lackluster. However, the news may not be disappointing enough to spark a major selloff of the dollar. Later in the day, however, the Fed’s Beige Book may spark fireworks as the report will give a clearer picture of the central bank’s view of the economy ahead of the December 11 FOMC meeting. EUR/USD has thus far gone on to test trendline support just above 1.4700, and if price can hold above this level throughout Wednesday’s price action, Thursday’s event risk could weigh the pair lower. US Q3 GDP is anticipated to be revised higher, and the markets may perceive the data as a suggestion that the economy is better equipped to handle the tightening of the credit markets, collapse of the housing sector, and possible drop in consumption without falling into recession. If fed fund futures start to cut back speculation of a rate cut by the FOMC, the greenback could see sustained gains and push EUR/USD down towards 1.4550.
However, if US economic data remains resoundingly negative in coming days, dollar bears may take advantage of current price levels and push EUR/USD higher for another test of 1.50.
Has EUR/USD topped out or will the pair test 1.50 again? Discuss the topic in the DailyFX EUR/USD Forum.

[B]Equities – Dow Jones Industrial Average[/B]
Intraday charts for the Dow show that price action has held to a descending channel, with the 13,000 level providing steady resistance while 12,700 provides support. With volatility dying down a bit and carry trades resuming their gains, it appears that we may see some stabilization of the Dow in the near-term. However, with multiple FOMC members giving clear indications that they will not cut rates on December 11th while the markets aggressively price in a 25bp reduction, the mispriced expectations could lead volatility to spike upon the FOMC’s actual policy decision. Nevertheless, until then, equity investors may choose to trade on the present rather than the future. While Wednesday’s US event risk may prove to be disappointing for the Dow, price reaction could be minimal. Subsequently on Thursday, upward revisions to annualized Q3 US GDP could set the stage for further gains towards 13,388, as investors may construe the data as a suggestion that the economy is better equipped to handle the tightening of the credit markets, collapse of the housing sector, and possible drop in consumption without falling into recession. On the other hand, if the markets become markedly risk averse once again, a break of 12,700 will find the Dow targeting the August lows.

[B]Written by Terri Belkas, Currency Analyst for DailyFX.com[/B]