September Trade Deficit Shrinks as Exports Increase

The US exported a record amount in September allowing the trade deficit to unexpectedly narrow to -$56.5B (consensus -$58.5B, prior revised down to -$56.8 from -$57.6 originally reported). This puts the monthly deficit at the lowest level since May, 2005 as exports have expanded steadily over the past seven months.

The lower dollar is making US goods more competitive in the world markets, which is helping to sustain economic growth in the US. Exports rose +1.1%, with gains widespread across industries. The gain would have been even larger, except that aircraft deliveries dropped. Excluding price changes due to the dollar devaluation, exports rose +.6% based on volumes. The actual trade deficit, based on volumes, was actually close to unchanged from the prior month as imports rose +.5% in volume.

Imports rose +.6% MoM to the second highest level on record as imports of oil, automobiles and computers rose. The higher price of crude oil was partially offset by lower volumes imported.

The trade deficit with China continued to widen, increasing by 5.5% as US imports from China rose to the second highest on record. China's exports to the US now exceed Canada's exports to the US, which have traditionally been the highest among the US's trading partners.

Part of the surprise improvement in GDP in the third quarter is due to export demand. JP Morgan is now estimating that third quarter real GDP in the US will be revised up to 5.2%, versus the initial estimate of +3.9% annualized when today's data and the recent inventory data is included. The government estimates that exports grew 23% annualized in the third quarter. This was the fastest quarterly pick-up in exports since 1996. This improvement is partially due to other economies growing more rapidly than the US, such as India at +9.3% YoY, China at +11.5%, and Argentina at +8.7% versus the US at 2.6% YoY.

Interest rates are currently 34bp lower for 3m T-bills, and 2bp lower for 10y Treasuries. The dollar is down slightly and oil is down 40cents. Equity futures indicating a substantially lower opening. S&P futures down 13.5.