Friday, July 27, 2012

GDP, Consumer Sentiment, CSTR, FB & more ...

Again, given that we have been on the road we could not provide a more timely update our view regarding economic and financial news.

The initial reading on the Q2 real GDP annualized growth rate (released at 8:30AM ET today) was 1.5%, slightly below our 1.6% estimate but higher than the 1.2% consensus.  In addition, Q1 was revised up by 10bps to 2%, slightly above the last print of 1.9%, which was inline with our projection.

  • There was deceleration in personal consumption, from a 2.4% growth rate in Q1 to 1.5% in Q2.  The only component of personal consumption with higher Q/Q growth rate was services.  Durable goods actually turned negative, from Q1's 11.5%!
  • Gross private domestic investment increased nicely to 8.5% from prior quarter's 6.1%.  This was mainly driven by more investments in equipment and software.  Residential and non-residential investments showed deceleration.
  • Goverment portion of the GDP continued to decline, but at a much slower rate (-1.4% versus -3.0% in Q1), helping the overall growth rate to remain positive.  From a political perspective, it is always interesting (and not surprising) to see national defense spending improve from -7.1% to a mere -0.4%, while nondefense spending annualized growth rate basically plummets from 1.8% to -0.3%!

Overall, we were not very surprised.  However, as usual, many economists/analysts lower expectations too much so that the market can react positively; a very effective strategy that has been used for decades.

University of Michigan's initial July consumer confidence index came in at 72.3, slightly above the 72.0 consensus.  We note that we expected a m/m decline, and based on June's upward revision, we got one.  June was adjusted up to 73.2 from 72.0.

The alarming part of this report is that while the current consumer sentiment improved slightly, expectations dipped more.

It appears that many consumers are starting to worry about not only their non-growing income but also higher food prices.  Only 10% expected real growth in income next year, and only 22% over the next five years!

Less consumers are also indicating job growth, 18% versus June's 34%.

We have certainly discussed lack of jobs and wage growth many times before.

While the equity market continues its two-day run, we must point out, again, that the better economic news, is not necessarily good for the market as it lowers the chances of a QE3.  And the 'better' news to which we are referring is not necessarily good news, it is just better than the very strategically lowered expectations that we see on the Street these days.  Simply put, QE3 is being priced in at the same time that chances of a QE3 launch is declining.  Let's see if the latest rally can be justified by next week's July employment data.  We don't think so, but economists have likely lowered the bar so much that any positive NFP would look good.

S&P 500 is up 14.6, or 1.07%.  CSTR and FB are down 12.56% and 13.8%, respectively, while such ‘great’ economic news has pushed XHB up 0.65%. 

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