Economic news provided a positive trading environment Thursday, following up on Wednesday’s data. Reports on 2^nd quarter GDP and jobless claims both were better than expected and oil prices erased early gains to trade lower. Friday will be a busy session for economic data with reports on personal income and outlays, NAPM-Chicago and consumer sentiment on tap.

On Wednesday, durable goods orders rose more than expected, providing a more positive outlook for the economy. This view picked up more steam Thursday with the release of the 2^nd quarter GDP. Growth in the 2^nd quarter came in at 3.3 percent, up sharply from the initial reading of 1.9 percent. Economists were looking for the revised figure to come in at 2.7 percent. Strength was seen in exports and durables consumption. Real GDP came in at 2.2 percent year on year, down from 2.5 percent in the first quarter.

On the inflation front, the GDP price index was revised to an annualized rate of 1.2 percent, a tenth higher than the initial figure. Inflation for final sales of domestic purchases was revised to 4.3 percent, up a tenth from the initial estimate and up from 3.6 percent in the first quarter. Core PCE inflation was unchanged at 2.1 percent, down 2-tenths from the first quarter. Overall, inflation is still too high for the Fed and unless it curtails in the near future, the FOMC is likely to raise interest rates.

The jobs market has been soft in 2008 with jobless claims averaging 440,250 the past four weeks. For the week ending Aug. 23, claims fell by 10,000 to a level of 425,000, roughly in line with expectations. The bad news is the continuing claims for the prior week jumped by 64,000 to a level of 3.423 million, which happens to be a five-year high. Unfortunately, jobless claims are roughly 100,000 higher than they were in the year ago period.

Oil prices continued to show a lot of volatility Thursday with crude hitting a high above $120, but ultimately closing with a decline of $2.56 a barrel to $115.59. Initially, oil prices continued their recent rise on concerns about Tropical Storm Gustav. However, a climb in natural gas supplies lifted worries about weaker energy demand and Reuters reported that the IEA and U.S. government are ready to release oil from the emergency reserves if Gustav does disrupt oil production in the Gulf of Mexico.

Friday’s calendar includes more data on manufacturing with the NAPM-Chicago expected to come in at 49.8 for August, down a point from July. The index has been below the key 50 level in five of the past six months, which is the line between contraction and expansion. Traders will be looking at the prices paid component to see if a decline in energy prices is being felt by manufacturers in the Chicago area.

Personal incomes in July are set to fall 0.1 percent with consumer spending up 0.2 percent. The core PCE price index, a key measure of inflation by the Fed, is expected to show growth of 0.3 percent, matching June’s level. However, the headline PCE price index should see a decline given the drop in energy prices. In June, the headline figure rose 0.8 percent.

Consumer sentiment is expected to come in at 62.0 as measured by the University of Michigan. This would be up slightly from the mid-month reading of 61.7 and nearly a point better than July’s figure. Inflation expectations will get a lot of attention in this report with July’s figure coming in at 4.8 percent.


Jody Osborne
Senior Staff Writer & Options Strategist
Optionetics.com ~ Your Options Education Site

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