The U.S. economy extended its nine-year expansion last quarter, Commerce Department figures confirmed Friday, but slowing global trade, as well as the prospect of rising interest rates at home and political tensions abroad, could challenge President Donald Trump ambition for a 3% annual growth rate.

U.S. GDP at 3.5% clip over the three months ending in September, down from the 4.2% pace recorded over the second quarter but topping the consensus forecast of 3.4% and still firmly in-line with the President's aim of a full-year advance of 3%. Slowing exports in the fact of trade tariffs between the U.S. and China, evidenced through the biggest trade deficit with China on record through the first nine months of the year, will likely bite into topline GDP and could signal deteriorating readings into the end of the year and 2019.

"The change in real net exports (-$98.1 billion) was much bigger than the $61.4 billion improvement in Q2, which the President hailed as evidence that his trade policies are working," said Pantheon Macroeconomics' Ian Shephedson. "We're looking forward to the spin on Q3."

"The Q2 improvement was simply the reversal of the surge in the deficit after Hurricane Harvey, which drove imports above trend for a time as people and businesses replaced lost/damaged items," he added. "The bottom line on trade is that final domestic demand is rising faster than domestic supply, so the trend in the deficit is bound to continue deteriorating."

���� Q3 GDP: Note that annualised GDP growth of 3.5% overstates momentum in economy due to huge upswing in inventories, a negative for growth in future quarters pic.twitter.com/CS7lqaLUED

— Johnny Bo Jakobsen (@jbjakobsen) October 26, 2018

The bearish prospect is being played out in asset markets around the world Friday, with benchmark 10-year U.S. government bond yields rallying to 3.08% as investors pile into safe-have trades amid disappointing corporate earnings outlooks, and WTI crude oil prices falling a further 65 cents per barrel to a mid-August low of $66.68 per barrel.

The U.S. dollar index, which benchmarks the greenback against a basket of six global currencies, was marked 0.14% higher in early Friday trading at 96.81, extending its year-to-date gain past 5%.

In equity markets, the Philadelphia Semiconductor index, a benchmark of chip and tech stocks that investors often use a proxy for corporate growth and investment prospects, has fallen 18.8% from its March peak as big names such as TSMC (TSM - Get Report) , Texas Instruments (TXN - Get Report) and STMicroelectronics (STM - Get Report) have forecast softer outlooks for its key processors.

Earlier this month, Bank of America Merrill Lynch's benchmark monthly survey of global fund managers showed they are the most pessimistic on world economic growth since the financial crisis although most are holding equity positions steady even amid concerns that corporate profits will slow and activity will ease amid the ongoing U.S.-China trade war.

The October edition of BAML's Fund Manager Survey, which polled 231 investment managers who run more than $646 billion worth of assets, noted that investors are also holding cash positions steady in their portfolios at 5.1%, the highest in 18 months, and still consider a global trade war the biggest "tail risk" for the market for the sixth consecutive month.

Curiously, amid the increasing signs of both a U.S. and global slowdown, President Donald Trump's most recent appointment the the Federal Reserve, Richard Clarida, said Thursday that "if the data come in as I expect, I believe that some further gradual adjustment in the federal funds rate will be appropriate", suggesting the new vice chair is of similar mind to his boss, Jerome Powell.

However, trade tensions with China, and its expected impact on the GDP reading, as well as disappointing new homes sales data and findings from the Federal Reserve's October Beige Book survey of domestic manufacturers, which showed increasing concern for rising raw materials costs and uncertainty over global trade prospects, are keeping investors cautious.

That, as well as Trump's renewed criticism of Powell, has trimmed rate hike expectations for December, which are now sitting at 70% according to the CMEGroup's FedWatch tool, and for March, where futures point to only a 41% chance of a rate move in the first quarter of next year.

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