October Ends with Positive GDP Surprise, QE 2.0 Next Week?

Friday, October 29, 2010

October's last trading is today falling on a Friday and featuring the advance 3rd quarter GDP reading. After the 8.8% gain for the S&P 500 in September, October looks to be another move to the upside of roughly 3.5%. The Bureau of Economic Analysis reported advance GDP quarter-over-quarter annualized growth of 2.0% exactly inline with economists' expectations. Notably, the price index ticked up 2.3% versus the 1.8% estimate showing some higher inflationary pressures. (News Release)

All eyes now shift to the major events of next week. Next Tuesday is election day where Republicans are anticipated to have significant gains in seats. Yet, probably more importantly is the FOMC meeting on Wednesday where it is widely believed the Federal Reserve will announce round two of quantitative easing. Consensus seems to be somewhere between $500 billion and $1 trillion with notable outlier estimates from Goldman Sachs analysts claiming anything short of $4 trillion will have little impact.

Markets are likely to sit in a holding pattern while we await the Fed's decision. I am skeptical of QE 2.0 and see this morning's GDP number as evidence that the economy is still in recovery mode and does not need additional monetary stimulus. While the Bernanke Fed has been very dovish I think we may see a more cautious toe dip rather than a full plunge into QE 2.0. Markets seem to have counted some of their chickens a bit early here and some level of QE is already priced in. I have been long the dollar throughout October but the trade has really gone nowhere so far. The lows are my out and I will also await the FOMC policy statement.

Brandon R. Rowley
"Chance favors the prepared mind."

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