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That’s Better — Economy Recovered in Q2, But Enough to Force Fed?

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July 30, 2015

Early stock indicators soured and Treasury yields rose Thursday after an improved Q2 GDP reading wasn’t quite up to snuff and jobless benefits claims ticked higher. Earnings news largely sputtered, too, as a strong dollar continued to haunt multinationals including Procter & Gamble (PG) and Colgate-Palmolive (CL), which have now logged four straight quarters of disappointing earnings.

Today’s choppy action followed similar trading conditions at Wednesday’s close after the Federal Reserve kept interest rates on hold as expected but still hinted that it’s ready to start tightening monetary policy in the fall, depending on what Fed members see in incoming data. It wasn’t no-room-for-doubt statement that Wall Street may have craved. But the dollar gained anew amid forex market expectations for a 2015 rate hike.

FIGURE 1: POST-FED CHURN.

The S&P 500 (SPX) bounced mildly in back-to-back sessions as traders continue to assess Federal Reserve interest-rate timing. Data source: Standard & Poor’s. Chart source: TD Ameritrade’s thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

GDP Improves But is it Enough? The U.S. economy expanded 2.3% in Q2 according to the latest gross domestic product (GDP) reading. That was shy of the 2.7% pegged by Wall Street economists. It follows an upwardly revised 0.6% gain in the first three months of the year (that figure was revised from the 0.2% contraction reported earlier). This GDP reading is a report that some industry economists say could sway a Fed move in September or convince the panel to wait. It’s hard to tell if this is the pace of growth that leaves the Fed confident to wean the economy from low rates just yet. Also included in the release: a major statistical reworking of past GDP data shows U.S. growth averaged 2% in 2012-2014 not the 2.3% clip initially reported.

Fed: Are We Any Clearer? Is the Fed ready to move on interest rates for the first time since 2006 come September? It depends on who you ask. Mixed assessments followed a fairly benign Fed statement issued Wednesday afternoon. The Fed remains data-dependent that much is clear. The panel has long said it needs to see “… further improvement in the labor market and is reasonably confident that inflation will move back to its 2% objective over the medium term.” At this meeting, the Fed added one word to that sentence to say it needs to see “some further improvement” in the labor market, an indication, say some economists, that only a little more progress is required before the Fed pulls the trigger.

Facebook: Bulls Don’t Like. The Facebook (FB) earnings report delivered in some areas but not enough to convince investors; shares dropped after the post-bell release on Wednesday and early today. FB posted a 39% rise in Q2 revenue, a sign it’s spending more to advertise across the social network, industry analysts said. But its spending is what could be turning off the bulls. Income fell over 9% from the year-ago period to $0.25 a share. But without certain expenses, the company said it would have earned $0.50 a share. Facebook said in April that costs and expenses would rise as much as 65% this year as it invests in data centers, hiring, and more including drone technology. Q2 expenses rose 82%, FB said.

Good trading,
JJ
@TDAJJKinahan

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JJ Kinahan

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