US GDP report surprises to the upside but tougher tests will come later

The Q3 GDP report of +3.5% was stronger than the expected report of +3.2%. Moreover, the data underlying the report provided some evidence to suggest that the U.S. recovery will be sustainable and will not simply fizzle out next year. The Q3 GDP increase of 3.5% was the first positive GDP figure after four straight quarters of negative growth.

The positive Q3 GDP figure ended the recession, at least in GDP terms, and left the 2008-09 recession at a total decline of –3.8% from peak to trough, the worst recession in post-war history. The National Bureau of Economic Research, the official arbiter of recessions, dated the beginning of the recession in December 2007, a half year before GDP turned consistently negative in Q3-2008. The U.S. recession likely ended this past summer, but the NBER will wait for up to a year to announce the official end of the recession so that they have a more complete set of data and can see if the U.S. economy might slip back into recession after a quarter or two of temporary relief.

The Q3 GDP figure was artificially inflated by the cash-for clunkers program and by the federal government stimulus programs. In fact, the GDP report would have only been up 1.9% excluding the auto sector, which received a huge boost from the July-August cash-for-clunkers program. However, there was enough underlying strength in the report to convince most forecasters that GDP growth will carry through at positive rates over the next year. The market consensus from a recent Bloomberg News survey of 65 economists is that US GDP will remain positive at +2.4% in Q4 and then stabilize at +2.5% in the first half of 2010.

The market consensus is that GDP will rise by only 2.4% in 2010 and by 2.8% in 2011, which is well below the post-war average of +3.3%. The subpar growth is expected due to the negative effects of the labor market, housing market, and continued high debt levels. That may leave some room for some positive surprises in coming quarters since expectations for the economy remain low.

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The numbers below represent the Commercial Net Traders positions taken from the weekly Commitment of Traders (COT) report released by the Commodity Futures Trading Commission each Friday. You will find a 12-month high and low with the past 2 weeks of data. To see the past 52 weeks of commercial data please visit www.pricecharts.com. Simply open Analysis under the Resource category at the top of the screen and click on the Commercial Tracker on the left side selection menu. You will find this to be a very interesting presentation of the commercial COT information.

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Fundamental:
Dec 10-year T-note prices corrected down to a one-month low from their recent five-1/2 month high while the 10-year T-note yield shot up to a two-month high of 3.58%, moving farther above its recent five-1/2 month low yield of 3.10%. Bearish factors for T-note prices include (1) the larger than expected decline in weekly continuing unemployment claims which tumbled to a seven-month low of 5.797 million (-148,000 versus expectations of -18,000), and (2) a possible huge increase in Treasury issuance after the prediction from FTN Financial that plans by the Treasury to lengthen its average maturity of its outstanding debt to 72 months from 49 months will mean boosting sales of 10-year and 30-year securities by 40% over the next year to $600 billion. Bullish factors include (1) the unexpected decline in Oct US consumer confidence (-5.7 to 47.7 versus expectations of +0.4 to 53.5) with the measure of employment availability within the consumer confidence report falling to a 26- year low, and (2) the prediction from Barclays Capital that Treasuries are poised to extend gains as demand for government auctions will remain strong and as the equity market remains vulnerable.

FOMC expectations—Market expectations for Fed policy were unchanged for the remainder of the year and were little changed for a tightening of monetary policy from mid-2010 and beyond. The market expects no significant chance of a Fed rate hike at the remainder of this year’s meetings. However, the market is then expecting a slow rise in the funds rate to 0.50% by July 2010, to 1% by Nov 2010 and to 2% by July 2011.

Legend:
CC  - consecutive closes
UTL - uptrend line
DTL - downtrend line

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