The Commerce Department released its third and final estimate of 2Q GDP this morning, showing a modest improvement from the previous report. Today’s report shows 2Q GDP rose 1.3 (annual rate), up slightly from 1.0% in the last report. This number was slightly better than the pre-report consensus of 1.2%.
Today’s GDP report probably serves to lessen fears that the economy has slipped back into a recession in the 3Q, but such confidence may be misguided. The fact is, we won’t get our first glimpse into 3Q GDP until near the end of October. That is when the Commerce Dept. will release its advance estimate of 3Q GDP. Until then, we just do not know.
The other report released this morning was “initial claims” – the number of people filing for new state unemployment benefits during the week ended September 24. Today’s number came in at 391,000, well below the pre-report consensus. That is down from 428,000 in the previous week and is the first time the number has been below 400,000 since the first week in April.
Both reports were well received by the markets, and US stocks opened sharply higher. I continue to believe that the major trend in stocks is down, but as you can see in the chart, we’ve been in a broad trading range since early August.
I also continue to believe that the main driver in the stock markets continues to be the European debt crisis. Of late, there is some encouraging news on this front, if you can call it that. As of today, 12 of the 17 Eurozone countries have voted in favor of funding the European Financial Stability Facility (EFSF) at the initial level of €440 billion which was agreed to by the leaders back in July. As I have written often, things move very slowly in Europe.
The EFSF votes that you are hearing about in the news this week do not reflect what was discussed at the latest IMF/G-20 meeting last weekend in Washington, which I wrote about at length in my E-Letter on Tuesday. At that meeting, there were discussions about leveraging the EFSF up to at least €2 trillion in order to bail out Italy and Spain if needed.
At that same meeting, the leaders talked about a new TARP-like rescue fund of apprx. €150 billion to recapitalize Eurozone banks. And there was talk of allowing Greece to default on up to 50% of its debt – if the EFSF is expanded and the Euro-TARP is in place. At the earliest, these measures won’t be voted on until late October, if at all. The point is, a lot could still go wrong or fail to materialize in Europe just ahead, and this could continue to be a negative influence on global equity markets. For now, assume we are still in a bear market.