Market Commentary

First quarter GDP is released today.
April 30, 2010

First quarter GDP is released today.  Consensus is expecting a 3.3% increase in output down from the fourth quarter rate of 5.6%.  The composition of growth however is expected to be somewhat stronger.  Inventories are expected to add about 1% to GDP versus almost four points in the fourth.  Consequently real final sales which is domestic GDP less inventories is expected to rise about 2.7% versus around a 1.7% gain last quarter.

The main factor for this acceleration in final demand is stronger consumption spending, rising around a 3.5% rate versus a 1.7% gain in Q4.  Investment in equipment and software is anticipated to moderate from the fourth quarter’s torrid 19% pace.  Inflation is not expected to be an issue.

While many will write GDP is a backward looking data point, I think it offers considerable insight about the economy’s momentum.

Speaking of momentum, the last leg of the record treasury refunding was a non event.  Demand was strong perhaps the result of sovereign debt issues.

Speaking of sovereign debt for the first time US corporate bonds are yielding less than European sovereign debt.  [Bloomberg]  In my view this is the result of earnings and fiscal governance.  A record eighty percent of the S & P companies that have posted results have exceeded expectations.  First quarter results are now expected to rise by 44%.  As widely written fourth quarter profits surged 176%.

Several weeks ago I rhetorically asked what is the possibility that benchmark pricing may cease to exist given the fiscal irresponsibility of the American government.  For almost forever all debt traded off of a spread over treasuries.

 What are the odds domestic corporate debt will consistently yield less than treasuries?  About a month ago AA+  Berkshire Hathaway yielded less than the comparable two year treasury, the first such occurrence of any corporate yielding less than the treasury in at least 28 years. [Bloomberg]

As noted many times, the financial system is awash with liquidity.  Non financial companies comprising the S & P 500 have a record $1.8 trillion in cash.  Excess banks reserves are around $1.4 trillion vs. the historical average of $1 to $2 billion as per the Federal Reserve.  Where will this money gravitate? 

Commenting briefly about yesterday’s market action, stocks ended higher because of positive profit reports.  Bonds advanced nominally on the successful treasury auction.

What will happen today?  First quarter GDP will be released at 8:30.

Last night the foreign markets were mixed. London was down 0.37%, Paris down 0.08% and Frankfurt up 0.32%.  Japan was up 1.21% and Hang Sang up 1.59%.

The Dow should open nominally higher but this could change given the potential significance of the 8:30 data.  The 10-year is off 4/32 to yield 3.74%.