I am going to be away from my desk next week, and don’t expect to be posting much -- at least not until next Friday.
I’ll miss three key data releases:
The October trade data on Tuesday.
The October Treasury data on foreign purchases of long-term securities on Wednesday.
And the third quarter capital and current account data on Thursday.
I suspect that these releases will get a lot more than usual scrutiny in the financial markets, and in the market place of ideals. General Glut usually dissects the monthly trade data, for example.
Here is my quick advance take on what to look for the trade and balance of payments data releases -- I have no clue what to expect in the Treasury capital inflows data.The trade data. I have a suspicion that the October monthly trade deficit will be a bit larger than the $51.6 billion September deficit. Why -- Oil. We already know that oil import prices ticked up in October (they fell in November). And the September oil import volumes were quite low. Exhibit 17 (p. 25) of last month’s trade release tells you what you need to know -- a fall in import volumes from 430 thousand barrels to around 390 thousand barrels knocked $1 billion off the September trade deficit.
Combine higher oil prices in October than in September with oil import volumes in line with the general trend for this year, and the October deficit should exceed the September deficit -- a higher oil import bill alone might add $2 billion or so to the October deficit, with imports of say $17 billion in October v. $15 billion in September. Indeed, if oil import volumes return to the 425 thousand barrels range of August, a $18 billion oil imports bill is not out of the question. That would be a $3 billion increase.
Of course, any tick up in monthly trade deficit from oil could be offset by some unexpected changes in non-oil import and export growth. Or another unusually low oil import volume number might keep the deficit from going up. It is certainly no slam dunk, but the odds are that the trade deficit expanded in October on the back of higher oil prices.
I also would look carefully for any evidence that non-oil import growth is slowing from its current torrid pace. As long as non-oil imports are growing above 10% y/y, it almost impossible for exports to grow fast enough to reduce the trade deficit. The export numbers will show provide a new data point to help assess whether the lagged impact of dollar depreciation in 2003 (notably the large depreciation v. the Euro) will keep US export growth strong even as the global economy slows a bit, or whether a slowing global economy will trump the lagged impact of dollar depreciation.
The current account data is interesting not because of the data on the current account -- the trade deficit drives the current account, and we already know the q3 trade deficit -- but for the capital account data showing how the US is financing its current account deficit. Look in particular for any evidence that the US is once again starting to attract positive inflows of foreign direct investment, or whether outward US FDI continues to exceed inward US FDI. It would not be a complete surprise if inflows from foreign central banks played a smaller role financing the deficit in the third quarter than in the first half of the year: remember that the Japanese did not intervene at all, and the reported increase in official holdings of Treasuries was relatively subdued -- $34 billion in q3 v. $54 billion in q2 and $95 billion in q1. The September TIC data showed $42.5 billion in central bank purchases of long-term securities in the third quarter -- a number that would put amount of new financing from foreign central banks below the pace of q2 ($74 billion), let alone q1 ($128 billion). (data comes from this BEA publication)
I would not read too much into this though -- there is a clear explanation for the fall off in official financing in q3 -- Japan. The q1 pace was unusually high, and my estimate of total central bank financing of the US after three quarters ($244 billion) is only slightly below the total recorded central bank financing in 2003 ($248 billion). And we know from the work of Higgins and Klitgaard that overall official financing is larger than the totals that show up in official data. The US, in effect, pre funded some of its 2004 deficit by attracting such large inflows from foreign central banks in q1 ... total central banking financing in 04 is on pace to exceed central bank financing in 03. The real question is 2005.