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Better than Expected GDP Could Support Demand for Higher Risk Assets

James Hyerczyk from ForexHound.com at 01/29/10


U.S. stock indices may see fresh buying today if GDP exceeds today’s consensus estimate of 4.5%. What this market needs right now is a shot of confidence, and news that the economy is improving at a better rate than forecast could be exacting what investors have been waiting for. The problem is whether investors will be paying more attention to past data such as the GDP or current reports regarding sovereign debt issues in Greece and Portugal.


If the situation in the Euro Zone continues to escalate and capture the bulk of the headlines, then look for investors to turn more risk averse.  This would trigger a rally in the Dollar and pressure stock indices and gold. Overnight, the March E-mini S&P 500 traded down to .618 support before mounting a short-covering rally. This level at 1069.50 is now being read as major support. Regaining the 50% level at 1084.50 will be a sign of strength and could help form of a closing price reversal bottom. 


March Treasury Bonds rallied overnight but found resistance at a major 50% price at 118’24.  Bearish traders want to see this price hold in order to attract more sellers who could eventually drive this market to the down side objective at 116’06.  A weaker than expected GDP figure today will likely trigger a rally as this would indicate the economy was not growing as fast as expected.  A bullish GDP number is bearish because it gives the Fed another reason to begin raising interest rates.


February Gold continues to trade both sides of major support at 1075.20. This market seems to be on life support while waiting for the Dollar to make its next move. A stronger Dollar could help plunge this market $50 to $100 over the near term.  A weaker Dollar is likely to trigger a short-covering rally to $1119.10.


The March Crude Oil contract is trying to establish support near the December bottom at 72.53. Bullish oil traders want to see a better than expected GDP figure. This would be an indication of expansion in the economy and an increase in future demand for petroleum products.  A stronger Dollar could put pressure on this market today.


The U.S. Dollar is slightly better against a basket of currencies this morning after trading in a tight and narrow range overnight. Trading action was subdued as investors await this morning’s key U.S. GDP data.  The Dollar is trading higher versus the Euro, Yen and Aussie Dollar while weakening against the British Pound, Swiss Franc, Canadian and New Zealand Dollars. In addition to the GDP report, traders will also get the chance to react to the Employment Cost Index, Chicago PMI and Consumer Sentiment.


The Employment Cost Index is a measure of total employee compensation costs, including wages and salaries as well as benefits. Since the U.S. economy has become so sensitive to jobs related data, this report may carry some additional weight today. Last month’s report showed a rise in the index of 0.4%.  This month, the range of this report is projected at 0.4% to 1.5% with the consensus at 0.4. Traders expect to see that continued high employment and salary freezes have kept employment costs soft. 


The Chicago PMI is usually a market mover. This report is a survey of business conditions in the Chicago area.  It contains data on both manufacturing and non-manufacturing companies. This index rose sharply in December indicating a pick-up in activity.  In fact, the survey showed that Chicago business activity has been very robust; accelerating for three consecutive months. Last month’s report showed the index at 60, but the consensus is calling for 57 this time inside the range of 55 to 60.  Traders will want to see if the momentum of the past three months continues or weakens.


The Michigan Consumer Sentiment number generally receives a lot of attention.  This month’s report should be no exception, as the consumer has become a key indicator as to how the economy has been performing and is expected to perform. Trader confidence has been a key indicator during the recession and the current recovery because it reflects consumer feelings about home values and employment which could be key indicators as to future spending habits. The last report was pegged at 72.8.  Today’s report is expected to range between 72.0 and 73.9 with the consensus at 73.0.  The recent drawback in the stock market could have had a negative effect on this month’s report.


The most important report of the day is the U.S. GDP figure. This report is expected to show the economy grew between 3.5% and 5.7% during the 4th quarter with the consensus at 4.5%. The markets want to see a second consecutive quarter of growth following an annualized gain of 2.2% in the third quarter. This would indicate that the economy is gaining momentum after pulling out of the recession.  Momentum could be a gauge of future hiring by businesses. The weaker Dollar during the last quarter should lead to better net exports in this report.  In addition, this report should show that businesses increased spending and are building their inventories in anticipation of further expansion. While today’s GDP will most likely show strong contributions to the economy from businesses, the key will be whether the consumer responded by spending during the last quarter of 2009 and if housing is projected to continue to improve.


After today’s reports, traders will reassess risk appetite. The Dollar may feel pressure if demand grows for higher risk. Fear that the economy is faltering could generate upside pressure on the Dollar while pressuring stocks and commodities.


Also on the table for investors today is the continuing dire news coming out of the Euro Zone. Lingering concerns over sovereign debt issues in Greece and Portugal could pressure higher yielding currencies while supporting the Dollar and the Japanese Yen. The direction of the USD JPY will be a good indicator as to how the market feels about risk today.


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