Economic growth could be October surprise

If third-quarter GDP comes in as expected Friday, it could be one of the best readings for economic growth in two years.

CNBC/Moody's Analytics Rapid Update showed economists Thursday expected third-quarter GDP growth to be tracking at an even higher 3 percent pace, after Wednesday's advance trade data. If growth comes in closer to 3 percent, it would be the first time in two years that it topped 2.6 percent, the high from Q2, 2015.

"GDP is the one piece of data we're going to keep a close eye on, and we hope it comes in as expected," said Art Hogan, chief market strategist at Wunderlich Securities. "We want the pattern to be that the second half is stronger than the first half."

The consensus forecast for GDP growth is 2.5 percent, according to Thomson Reuters' survey of economists.

The market is expecting the Fed to raise rates in December and better growth will provide a smoother path to that hike. The bond market has also seen a sharp pickup in yields t his week on expectations for higher U.S. rates, but also as global central banks step back from promising further stimulus.

The 10-year Treasury (U.S.: US10Y) yield rose above 1.86 percent temporarily Thursday and was at 1.85 percent late in the day. It was at 1.79 percent on Wednesday.

"The backup in yields has been driven by the anticipation that the Fed's going to raise rates in December, and also comments out of [Bank of Japan Governor Haruhiko] Kuroda. [BOJ is] not increasing the size of their quantitative easing, and the European Central Bank is running out of gas and not extending their program past March," said Hogan.

Ian Lyngen, head of U.S. rates strategy at BMO, said the next target on the 10-year yield would be 1.89 percent. "We could do it tomorrow if we get a strong GDP number. That's well within the range of possibilities," he said. The next level after that would be 1.971 percent, and he expects 2 percent by the end of the year.

"The magnitude of the yield move was not particularly striking, but it was the fact that it challenged every meaningful support level with little in terms of fundamental impetus," he said. A better GDP report from the U.K. Thursday morning was one catalyst for the move higher in global rates, since it suggested that the U.K. economy was doing better than expected post-Brexit and the Bank of England may not need to ease further.

There has also been talk that the Fed, which meets next week, could sound hawkish and clearly signal an intention to hike at its "next meeting," in December. That has also helped support higher yields.

"I think it's got a good chance of being over 3 percent," said James Paulsen, chief investment strategist at Wells Capital. "I think the initial response would be that both equities and yields go up."

Paulsen said he expects the GDP report will fit into a trend of improving data. "There's a decent shot that this is another piece of an ongoing puzzle unfolding here. Things are turning up. Global economies are. Earnings are… It might be a new trend that lasts for a while here," he said.

But the report could also disappoint, like many GDP reports have in the past, and show that the economy remains trapped in a long sluggish trend.

Deutsche Bank chief U.S. economist Joseph LaVorgna expects growth of just 1.3 percent. Second-quarter growth was just 1.4 percent, and the two quarters before that were under 1 percent.

"We remain at 1.3 percent for Q3 real GDP growth, despite what on the surface could be a large boost from net exports," he wrote in a note Thursday. "Our hunch is that our projection is meaningfully below consensus because many forecasters estimate significantly stronger consumer spending gains last quarter than we do."

Besides the GDP report, there is also the employment cost index for the third quarter at 8:30 a.m. and consumer sentiment is at 10 a.m.

There is another wave of earnings news Friday, including oil majors Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX). Earnings are also expected from MasterCard (NYSE: MA), AutoNation, UBS, Hershey (NYSE: HSY), A-B Inbev, BNP Paribas, AbbVie, Philips 66, Weyerhaeuser (NYSE: WY), Tenneco, Xerox (NYSE: XRX) and Legg Mason.

Amazon.com shares were down more than 5 percent in late trading Thursday after its earnings report disappointed , andAlphabet (NASDAQ: GOOGL), which beat expectation and announced a share buyback, saw a modest roughly 1 percent rise in its stock.

"You miss on any of these things … earnings, revenues, guidance or gross margins — you get taken to the wood shed. Whereas, if you beat, you're up just a percent," said Hogan.

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