US GDP Pivotal to Market Sentiment on Thursday
There are plenty of major headlines that could impact markets Thursday, but they could all be overshadowed by what turns up in the third quarter GDP report.
Stocks fell on heavier than average volume Wednesday, and trading could be choppy again Thursday, depending on that GDP number and the weekly jobless claims report, both at 8:30 a.m. There are also major earnings reports, including Exxon Mobil and Procter and Gamble, before the open.
Later in the morning, Treasury Secretary Tim Geithner and other regulators testify before the House Financial Services Committee on sweeping changes proposed for the financial system. The Fed will also be making its final purchase of Treasury securities late Thursday morning, as it unwinds part of its quantitative easing program, and there is a major auction of $31 billion in 7-year Treasury notes at 1 p.m.
Economists forecast the GDP number to show growth anywhere from just under 3 percent to as high as 4 percent, and it is expected to be the first positive growth for the U.S. economy since second quarter, 2008. Consensus is at 3.2 percent.
"There are a lot of disagreements about what that number will look like, but most of the disagreement centers on the inventory part of it. There are some who think inventory liquidation might be accelerated, and some who think it has decelerated and that has major implications for what the headline looks like," said Pimco senior strategist Tony Crescenzi. That number will directly impact the outlook for the fourth quarter, and a lower Q3 number will mean higher fourth quarter growth, he said.
"Ultimately, the focus will be on final sales, which is GDP minus the inventory change," said Crescenzi. He expects that number to be about 1.5 percent. Final sales reflects activity in the economy, such as consumer and business spending and construction.
Economists expect the third quarter number to be inflated by the cash for clunkers program and other stimulus, and they expect the third quarter release to result in a lot of recalculations of fourth quarter estimates. The third and fourth quarter numbers are arguably also central to the determination of what shape the recovery might have - V, W, U or otherwise.
Miller Tabak's chief economic strategist Dan Greenhaus said he thinks the fourth quarter growth will be lower than third quarter, in big part because of the weak consumer. "I would make the case you could be closer to 2 percent than zero in the fourth quarter...but I'm still in the double dip camp. If anything's happened to our view, it's (weaker growth) been pushed out because of what happens to the extensions and expansions of all kinds of government support," he said.
"There's a lot of mixed October data points that have come out so far. You have a lot of confidence surveys that are weak. Jobless claims have hung in there in October. It's happening in fits and starts. Today's durable goods numbers were aspects of it. It was less than some people expected. This idea we're having this non stop V shaped recovery is not happening," he said.
CNBC did a snap survey of eight Wall Street strategists Wednesday afternoon as stocks sank and traders attitudes turned grimmer. Most of the strategists believe the stock market could still go higher this year, though Thomas Lee of J.P. Morgan said the market needs a strong number to snap it out of its sell off.
"We need tie breaking data," he said. "If GDP is not good, then we need the payrolls to be good. That is coming out next week." He said it's hard to say how deep the sell off will be, but he still expects stocks to move higher this year. His year end target is 1100 on the S&P 500.
Deutsche Bank strategist Binky Chadha, on the other hand, believes that the top for the year is in and his target is 1060. He had expected the market to continue a pattern established in the prior two quarters of moving higher on good earnings news before selling off as earnings season wound down.
"I don't think it's going to be a big sell off. My call is short and shallow," he said.
He also said the market is following a pattern it has seen at month end recently. "The monthly pattern suggests we sell off through Monday and then go up through next week. We've all noticed the pattern through the past few months," he said.
He said he had expected the S&P to peak at 1125 this year but instead it peaked at 1101. The S&P has now lost 5 percent from its October 19 closing high of 1097.
The Dow skidded 119 or 1.2 percent Wednesday to 9762, its biggest drop since October 1 and lowest close since October 7. The S&P 500 slumped 20 points or nearly 2 percent to 1042, just below a key technical level. The Nasdaq fell 56 or 2.7 percent to 2059. The worst performing S&P sectors were financials, off 3.2 percent, followed by materials, off 3.2 percent and energy, off 2.9 percent. Defensive plays were the better performers. Telecom was up 2.7 percent, followed by consumer staples, down just 0.4 percent.
The dollar gained Wednesday on worries about the global recovery as stocks and commodities weakened. It rose for a fourth day against the euro, after U.S. new home sales for September showed an unexpected decline of 3.6 percent. The dollar index touched a high of 76.513, its best level since Oct. 12.
Treasurys found buyers as the auction of more than $40 billion in 5-year notes drew strong bidding. The bid-to-cover ratio was 2.63, a measure of demand and the highest level in two years. Yields on the 10-year fell to 3.45 percent.
The Fed's final purchase of Treasurys is at 11 a.m. Thursday, and it will be buying in December 2013 to April 2016 maturities. The Fed has roughly $2 billion of the program's $300 billion left.
"It won't be a cliff effect on the Treasury market," Crescenzi said of the end of the program. "It's the MBS (mortgage backed securities ) market that matters more."
Crescenzi said the $300 billion in Treasurys is tiny compared to the $1.25 trillion the Fed expects to buy in total in the roughly $7 trillion MBS market. That program is expected to end in March.
What Else to Watch
Larry Summers, director of the National Economic Council, speaks in New York at the Economic Club of New York at 12:15 p.m.
A flood of earnings reports are also expected, including AstraZeneca, Royal Dutch Shell, Colgate Palmolive, Barrick Gold, CME Group, American Electric, Kellogg, Aetna, Newmont Mining, Burger King, AutoNation, Avon Products, Deutsche Bank and Expedia, among others. After the bell, Genworth, Hertz, Varian Semiconductor, BMC Software, KLA-Tencor, and Las Vegas Sands report.
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