US 3Q GDP supports Fed hike but a 2016 move not yet a forgone conclusion - ING

James Smith, Economist at ING, points out that today’s data that showed a rebound in GDP during the third quarter, supports the Federal Reserve ambition to hike in December. “But don't rule out the effect of political uncertainty, or a "rogue jobs report". A 2016 move is not (yet) a forgone conclusion.”

Key Quotes: 

“The US economy surged back in the third quarter, posting a respectable 2.9% annualised growth figure, with the underlying details showing encouraging broad-based gains. The clear highlight from the data was exports, posting a huge 1.2% increase on the quarter, by far the highest reading for several quarters.”

“So what does this mean for the Fed? Well, it’s another tick in the box for a December hike, although in reality it would have taken a serious disappointment to significantly derail expectations. In fact, we don’t think there is much potential for economic data over the coming weeks to be game changing, with one (or more precisely, two) possible exceptions.”

“We have two more labour reports to navigate before December’s meeting. We expect an encouraging report next week, but a serious disappointment would dent December expectations, although in reality, it would take an exceptionally low payrolls figure to completely write off a hike.”

“This means that the December decision now hinges on the market reaction to the US election. As we noted in our FOMC Preview, markets (eg, the Mexican peso) have largely priced out any Trump risk premium. But markets are unlikely to take a shock election outcome in their stride. Add to this the tail risk of a US government shutdown (9 Dec), and political uncertainty could keep the Fed on hold this year. But if markets are stable in the aftermath of the vote, a hike in December will look increasingly guaranteed.”