THE TAKEAWAY: USD Gross Domestic Product (3Q A) (ANN) > +2.0% versus +1.8% expected, from +1.3% > USDJPY BULLISH, AUDUSD BULLISH
The American economy continues to show signs of strength, with the third quarter growth reading the latest better than expected print for a big data print (see: October NFPs; September Durable Goods Orders). The annualized third quarter GDP print came in at +2.0%, better than the +1.8% forecasted, and better than the prior reading of +1.3%. Backed by steady Inventories and a curious note from Bloomberg News – that the drought shaved -0.4% off of the headline figure – the data released today looks solid.
Other data released this morning with the GDP reading was mostly mixed, however. Personal Consumption ticked up to +2.0% quarter-over-quarter from +1.5% q/q in the second quarter, but below the +2.1% q/q estimate. Meanwhile, the GDP Price Index, another alternative gauge of inflation, rose to +2.8% q/q from +1.6% q/q, well-above the +2.1% q/q forecast.
USDJPY 1-minute Chart: October 26, 2012
Charts Created using Marketscope – Prepared by Christopher Vecchio
Following the releases, risk-appetite increased across the board, with investors shifting into higher yielding assets. The AUDUSD jumped from 1.0338 to as high as 1.0370 before falling back to 1.0367, at the time this report was written. Meanwhile, the USDJPY, probably the best gauge of whether or not the Federal Reserve will implement more easing, rallied from 79.84 to 79.97, before falling back to 79.84.
The big question is: does this change the Federal Reserve’s monetary policy path? The answer is a resounding NO. First, growth is still considered weak. Coming out of the fourth quarter of 2011, at which the headline GDP figure was +4.1% annualized, the Fed still maintained its Operation Twist package. At the current rate of +2.0% annualized, there’s little reason to think that today’s data will make policymakers feel more certain about the economy as they have already exhibited displeasure with growth rates around the current level.
Moreover, while labor market conditions have improved on the surface (the common U-3 Unemployment Rate sunk to 7.8% in September) but labor market participants are displeased in droves – the Underemployment Rate (U-6) is still at 14.7%. The labor market’s Participation Rate is still sitting near multidecade lows at 63.6% (slightly higher than 63.5% in August), which means that Americans are dropping out of the employment pool – this artificially lowers the U-3 rate.
Finally, the inflation indexes that the Federal Reserve follows all remain at or close enough to the medium-term target rate of +2.0% year-over-year, meaning that neither inflation nor deflation is a serious concern at present time.
Needless to say, this is still not the stable recovery the Federal Reserve is looking for, as noted at their policy meeting this past week. Accordingly, we maintain our expectation that the Fed will step up asset purchases when Operation Twists finishes in two-months; a QE4 announcement (QE3 expansion or outright Treasury purchases) should be anticipated in December.
More US data is due out throughout the morning – get up-to-the-minute news at the DailyFX Real Time News feed.
--- Written by Christopher Vecchio, Currency Analyst
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