The US economy still has plenty of momentum. Inflation is making sure the Fed cannot get comfortable.
Growth beat expectations, September price pressures remained firm, and the dollar recovered its initial losses. Our read: this release weakens the case for broad USD selling, while keeping another Fed hike in play.
The numbers that matter
| Release | Latest | Previous |
|---|---|---|
| Q3 real GDP | 3.4% | 2.2% |
| Q3 private domestic demand | 4.9% | 4.6% |
| Q3 core PCE inflation | 2.5% | 3.3% |
| September core PCE, monthly | 0.3% | 0.3%, revised |
| September core PCE, annual | 3.1% | 3.0% |
| September headline PCE, annual | 3.6% | 3.4% |
Quarterly figures are annualised growth rates. Monthly and annual September readings measure different periods.
Growth has substance, but September lost some pace
GDP’s 3.4% expansion beat the Reuters poll’s 3.2% forecast, although it remained within that survey’s 1.0–4.2% range. A beat, certainly; a completely unexpected growth shock, less so.
The more useful detail is private domestic demand: consumer spending plus business and residential fixed investment grew 4.9%. That gives the headline genuine support.
There is a distinction worth getting right. Final sales of domestic product slowed to 1.7%, and inventories helped GDP. But that measure also includes trade and government effects. It is different from private domestic demand, which strengthened. Treating the softer final-sales figure as evidence that households and businesses stopped spending would miss the story.
September was less encouraging. Spending rose 0.5% in cash terms but was essentially flat after inflation; real disposable income fell 0.3%. Households paid more without buying much more. That is a warning about momentum entering Q4.
Inflation gives the Fed little room to relax
Quarterly core PCE slowed to 2.5%, but September’s monthly reading held at 0.3%, matching the 0.3% consensus reported by Barron’s. Annual core inflation edged up to 3.1%, while headline inflation reached 3.6%.
The quarter improved; its final month still left an inflation problem. Calling this an across-the-board cooling would overstate the good news.
Yesterday, the Fed held rates at 3.75–4.00%, with Cook and Hammack preferring a hike. Today’s combination keeps their argument alive: demand remains resilient and inflation is above target. It does not settle December’s decision, especially with real spending losing pace.
The dollar’s first move did not survive
DXY initially fell from 102.192 to 102.121, then reversed to 102.319 before easing to 102.278. The initial dollar-selling impulse had already unwound before the ECB announcement.
The ECB then held its deposit rate at 2.50%. Following that decision, DXY extended to 102.448, before pulling back to 102.339 in the latest snapshot. The euro weakened sharply alongside that move.
That second leg needs its own explanation: DXY is heavily weighted towards the euro, so this was also a European story. Attributing the entire rally to US growth or Fed expectations would overclaim what the price action tells us.
Bonds also saw modest buying after the US releases. Without confirmation from short-dated US rates, the evidence supports a dollar recovery more clearly than a new, lasting repricing towards Fed hikes.
Trade implications
Broad USD shorts lose conviction. The softer quarterly inflation figures have to be weighed against firm private demand and the dollar’s recovery.
EUR/USD: renewed euro weakness adds pressure, but Lagarde’s press conference can change the European side of the argument. The next move needs to be assessed against both policy outlooks.
USD/CAD: Canada’s tighter-policy backdrop remains relevant. However, the case for a lower pair still needs US rate expectations to weaken relative to Canada’s; this GDP report offers little help on that front.
What Invalidates This Thesis
The supportive USD interpretation weakens if softer US spending broadens into weaker employment and inflation, pushing expected US rates lower relative to peers. A firmer ECB outlook or stronger Canadian data could also erode the dollar’s advantage in those pairs. One index spike does not establish a lasting policy divergence.
Upcoming Risk Events (UTC)
- Today, 29 October — 13:45: ECB press conference; the immediate test for EUR/USD and DXY.
- Friday, 30 October — 12:30: US Employment Cost Index and Canadian GDP; wage pressure and relative growth matter for USD/CAD.
- Unscheduled: Middle East and energy developments could alter both inflation expectations and demand.
Sources: BEA GDP, BEA Personal Income and Outlays, Reuters GDP poll, Barron’s PCE consensus, Federal Reserve, ECB decision, BLS calendar and Statistics Canada calendar. Market reaction reflects intraday observations; quoted levels are not closing prices.