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Traders Watch US GDP, Europe Ahead of Weekend

The first read of first-quarter U.S. GDP Friday could drive financial markets, as investors look for signs of direction from an economy that has been sending mixed signals.

NYSE trader
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NYSE trader

While GDP is often considered more like looking into a rear view mirror, traders are hoping this report could serve as a roadmap for what type of momentum there might be going into the second quarter.

Jobs data has been one particular concern, after March’s weak nonfarm payrolls came in at half of February’s level. A string of elevated weekly unemployment claims reports since that weak 120,000 March jobs gain has added to concerns about the strength of April’s nonfarm payrolls, to be reported next week. Claims were high again Thursday, coming in at 388,000, above the expected 375,000.

GDP is reported at 8:30 a.m. ET, as is the employment cost index. Consumer sentiment is released at 9:55 a.m. Once more, there is a roster of heavyweight companies reporting earnings before the opening bell, including Procter and Gamble, Merck, Chevron and Ford. Weyerhaeuser, Newmont Mining, International Paper, Sanofi, Covidien, Simon Property, Goodyear Tire and VF Corp also report.

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Europe will also be a focus Friday. The euro fell late Thursday after Standard and Poor’s cut Spain’s debt rating by two notches to BBB-plus form A. The ratings agency, in a release after the New York close, said it expects Spain’s budget deficit to worsen due to economic contraction. S&P, meanwhile, affirmed Ireland’s BBB-plus rating.

Economists expect GDP for the first quarter to show growth at a consensus 2.6 percent, with forecasts spanning a wide range of 1.2 to 3.6 percent.

“We’re above consensus. We’re at 2.9 percent. If we got a number like that it would ease a little bit of the growth worries,” said Michael Feroli, economist with J.P. Morgan. “Some of the late data we got came in a little stronger. Early on, we got some disappointing data on domestic final demand. Toward the end of the quarter, we started getting good data on inventories and foreign demand.”

Jonathan Basile of Credit Suisse said he expects GDP at 2.8 percent. “We don’t really have enough to go on but our forecast is 2 percent for Q2. We do expect a little bit of a pause before we see better performance in the second half,” said Basile.

Basile said he’s also looking at Friday’s consumer sentiment, and particularly the unemployment expectations for a read on the employment picture. “We’ve seen an uptick off a 13-year low in unemployment expectations,” he said. In the last report, the percent of people surveyed who thought there would be more unemployment in the next 12 months, rose to a level of 21 percent, from 19 percent in March.

Stocks rallied Thursday, in part on a sense of reassurance that the Fed may still do quantitative easing if the economy stumbles. But earnings have also been a catalyst, with 72 percent of the S&P 500 beating estimates, according to Thomson Reuters. The Dow finished up 113, at 13,204, just 60 points off the four year high it was at on April 2. The S&P ended up 9 at 1,399, and the Nasdaq rose 20 to 3,050.

The Fed Wednesday issued a post meeting statement, then released its latest forecasts before Fed Chairman Ben Bernanke held a press briefing. Those events prompted a bit more market turbulence than expected. Bond yields Wednesday first rose, then fell, and stocks rose. Stocks then rallied again Thursday.

On Thursday, bond yields rose late in the day, but were lower as traders covered shorts and reacted to a disappointing jobless claims report, earlier in the day.

“I would say it (the Fed) was more dovish relative to the (bond) market’s hopes and expectations. You still have the vast majority (of Fed officials) saying that in 2014, rates are going to be close to where they are now,” said David Ader, chief Treasury strategist at CRT Capital.

“The most important thing that I took away was Bernanke continues to leave the door open. It’s not new, but it’s not backing away from QE3,” he said. While some strategists and economists Wednesday read the Fed’s messages as more hawkish, Ader said it was the first time the Fed said in its statement that it viewed the inflationary impact of higher oil as temporary, meaning the committee does not see inflation as a problem.

Also, the Fed reintroduced Europe as a potential problem by saying strains in financial markets continue to pose “significant downside risk.” In January, it had said those risks eased.

“The Fed was a little bit of a head scratcher at the end,” Feroli said. “Definitely the committee’s forecast, not only on the funds rate but the economy, is turning a little more hawkish. Then you have Bernanke coming out, talking like nothing has changed.”

Art Cashin, UBS director of floor operations, said the weak dollar was a boost to risk assets Thursday. “I think the Dow is the lead horse. I think they’ve just decided things are a little better. Earlier on, Europe looked bad, but Bernanke and his shenanigans have the dollar a little weaker. The weak dollar has made gold go up, oil go up,” he said.

Follow Patti Domm on Twitter: @pattidomm

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