The Day Ahead: Q3 GDP, Jobless Claims, Tax Credit Extension, Treasury Auction

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Before we get to market news, the big item this morning is that the tax credit for first-time homebuyers, set to expire on Nov. 30, is likely to be extended into April 2010, according to the office of Senate Majority Leader Harry Reid. 

The Wall Street Journal reports: “The agreement would extend the existing credit for first-time home buyers, worth up to $8,000, while offering a new credit of up to $6,500 for some existing homeowners, Senate aides said. The reduced credit would be available to all home buyers who have been in their current residence for a consecutive five-year period in the past eight years.”

Now, on to markets… Equities were slashed yesterday after the new home sales report posted an unexpected 3.6% decline for September. The S&P 500 fell 1.95%, the Nasdaq shed 2.67%, and the Dow moved further south from the 10k mark as it fell 1.21% to 9,762.69.

This morning, ahead of the first look at Q3 GDP, markets are cautious but generally looking up. That’s not bad considering economists at Morgan Stanley, BofA-Merrill Lynch, and Goldman Sachs all reduced their estimates for the preliminary survey earlier in the week.

Meanwhile, the US$ index is weaker after a 5-day rally, WTI Crude is up 40 cents to $77.86 per barrel, and Spot Gold is $7.20 higher at $1035.30.

Key Events Today:

8:30 ― Economists have high expectations for third-quarter GDP. Not only is output expected to be positive, thereby confirming that the recession is, technically, “over,” but the Street’s forecast is +3%, with estimates ranging as high as +4%. Not bad for an economy declining at a rate of 6.4% from January to March. 

“We think the economy expanded at a 3.7% rate,” said Ian Shepherdson from High Frequency Economics. “Consumption led the way with a clunker-boosted 3.2% gain. Fixed investments should be up 6.0%, but a $130 billion drop in inventories with add 1.0 percentage point to growth. Net foreign trade should subtract 1%, with exports up 14% but imports up 18%.” He adds: “Government spending should rise about 4%.”

Economists at IHS Global Insight are more optimistic than the Street; unfortunately, they believe the gains are based on temporary boosts. “The economy probably grew more than 4% in the third quarter, pumped up by inventories, cash for clunkers, and the tax credit for first-time homebuyers,” they wrote. “These are not the ingredients needed to support a V-shaped recovery. Indeed, IHS Global Insight expects the economy to grow just over 2% in 2010.”

8:30 ― Average initial Jobless Claims have been 525k so far in October, compared with 549k in September and 569k in August. So a clear downward trend is taking place even though last week’s figure jumped 11k to 531k. But the moderation isn’t happening quickly enough for the recovery to dispel the reputation for being a jobless one. Economists believe weekly claims must be closer to 350k per week to indicate any significant job creation.

“We look for initial claims to reverse the previous week’s 11k increase with a 16k decline, leaving the resulting 515k the lowest since January,” said Jennifer Lee at BMO Capital Markets. “Regardless of the week’s move, it is the trend that counts and so far, it is headed in the right direction ― which is south.”

  • Treasury Auctions:
  • 1:00 ― 7-Year Notes