The Day Ahead: Advance Q4 GDP Estimate, Consumer Sentiment, QEII Coupon Lift

A slim gain pushed the benchmark S&P 500 to its highest level since August 2008 yesterday. On the final day of the week, equities are improved ever so slightly and interest rates are higher as investors await GDP data for the last three months of 2010, as well as consumer sentiment for January.

The benchmark 10 year note is -10/32 at 93-11 yielding 3.431%. The FNCL 4.5 is -2/32 at 102-01. S&P 500 futures are up 0.75 at 1296.50 while Dow futures are 10 points higher at 11,954. Year-to-date, the S&P has gained 3.33%. 

Weighing on the markets is a rating agency warning that the U.S. may lose its triple-A status due to rising debt levels.  MND eluded to this headline risk on Tuesday. READ MORE

Moody’s Investors Service said it might give the U.S. gilt-edged rating a negative outlook because of widening debt burdens. 

“Although no rating action is contemplated at this time, the time frame for possible future actions appears to be shortening, and the probability of assigning a negative outlook in the coming two years is rising,” the agency said.

Standard & Poor’s earlier this week downgraded Japan, the world’s third-largest economy, one notch to AA-. It was the first downgrade for the country in nine years.

Key Events Today:

8:30 — The advance estimate for fourth-quarter GDP is expected to come in at +3.6%, according to economists polled by Reuters. Estimates range from +2.9% to +5.4%, indicating the final three months of 2010 were clearly stronger than the prior quarter’s +2.6% rate. Leading the way is retail sales, which may have jumped 4% in the quarter, and exports.

“We believe that 2010 ended with a +3.8% bang,” said economists at BTMU, adding that full-year GDP likely grew 2.9%. “That’s really a paltry rebound when you compare it to such a sharp drop in 2009 (-2.6%), but it was above the +2.5% rate considered to be the minimum growth needed to hold the unemployment rate steady. Indeed, it was enough growth to bring the unemployment rate down to 9.4% at the end of 2010 from 9.9% at the end of 2009.”

Economists at TD added that the economy is “beginning to pick-up significant tailwind” on account of loose fiscal and monetary policies.

“Strong consumer spending, which accounts for close to 70% of overall U.S. economic activity, should be the key driver for the burst in activity, with personal consumption expenditures expected to grow in excess of 3.5% Q/Q ― its fastest pace since late 2006,” they said.

9:55 — The preliminary Consumer Sentiment survey from Reuters / U of Michigan fell 1.8 points to 72.7, marking the first fall in several months. The slide surprised economists who believed a rising stock market would translate into higher sentiment. Instead, consumers were focused on higher prices and continued joblessness. In this final reading, the consensus forecast is set at 73.0, a bit up from two weeks ago but still below December’s 74.5 score.

Economists at IHS Global Insight are more pessimistic than the consensus, forecasting a  drop to 71.8.

“The current and expectations indices are both expected to fall, with the current situation index taking the bigger hit,” they predicted. “Consumer sentiment is being negatively impacted by high gasoline and food prices, although these are not severe enough to derail the increased consumer spending momentum.”

10:15 — The Fed will purchase an estimated $7-9 billion in Treasuries maturing between 2/15/2018 and 11/15/2020.