Investors were emboldened by an upward revision to US GDP in the fourth quarter and pushed equities higher for the fourth straight day.
Q4 GDP better than previously thought
Economic growth in the US was revised upward this afternoon, which restored confidence in the global economic recovery. US fourth-quarter GDP was revised from 2.8% to 3.1% as exports and consumer spending supported the economy. Exports rose 8.6% in the quarter, while imports fell 12.6%. Consumer spending increased 4%, which was slightly lower than the previous estimate of 4.1%, but is still an improvement on the 2.4% increase in the third-quarter.
Corporations also boosted GDP with spending on business equipment rising 7.7%, versus the previous estimate of 5.5%. Corporate sales rose to a record $1.678 trillion, but profits fell 3.3% to $1.369 trillion. However, total profit for 2010 gained 29%, which was the largest yearly gain since 1948.
The upward revision to US GDP gave the market a much needed reminder that the economic recovery is on track. Though there are some new risks that have emerged in the New Year which may temper growth, such as higher oil prices and rising tensions across the Middle East, there is also the potential that rebuilding in Japan could add to growth this year.
Consumer confidence drops
Consumer confidence is another factor that may hamper the recovery. The Thomson Reuters/University of Michigan consumer sentiment index fell 10 points to 67.5 in March. Economists were anticipating the decline as median estimates from Bloomberg forecasted the gauge to fall to 68. According to the survey, rising gas and food prices were the main contributors to the decline. Consumers were also not expecting their salaries to increase in the near term, which suggests employment conditions are expected to remain challenging.
Suppressed wage expectations coincide with non-existent inflation in the economy. The Fed’s preferred measure of inflation, core personal consumption expenditures, eased to an annualised 0.4% in the fourth quarter, down from 0.5%. That is the smallest increase on record and will be used by the Fed to demonstrate that its QE2 policy has not had an inflationary impact on the economy as many had predicted.
US equities
By 3.50pm (London time) the Dow Jones Industrial Average climbed 78.67 points (+0.645) to 12249.23, the S&P 500 gained 8.49 points (+0.64%) to 1318.15, while the Nasdaq 100 added 17.98 points (+0.77%) to 2330.07.
Oracle gained 3.77% to $33.35 after the software company said profit for the current quarter would be ahead of analyst estimates. Excluding certain items, profit is expected to be 69 cents to 73 cents a share, surpassing the 66 cents a share median estimate from analysts surveyed by Bloomberg. CEO Larry Ellison is simplifying the business and focussing on higher margin products with the help of its acquisition of Sun Microsystems. The company also saw increased demand for its cloud computing databases which helped license revenue exceed expectations.
BlackBerry owner Research in Motion (RIMM) plunged 10.05% to $57.65 after issuing a profit guidance that missed forecasts. The company said first-quarter profit would be between $1.47 and $1.55 a share, which was well below the $1.66 median estimate from Bloomberg. The company plans to ramp up promotions for the PlayBook tablet as it tries to gain market share from Apple. Jim Balsillie, CEO of RIMM said ‘This is a time of enormous investment and transition.’
Meanwhile, Apple’s iPad 2 went on sale outside the US in 25 countries today. The product first went on sale in the US on 11 March and there is already a three- to four-week waiting time for new stock. Apple shares rose 1.39% to $349.78.
UK equities
Reckitt Benckiser gained 3.3% to 3165p this afternoon after BofA Merrill Lynch Global Research recommended buying the shares. African Barrick Gold rose 2.65% after finding more gold at the Nyanzaga Project in Tanzania.
Autonomy Corporation was the biggest faller after shedding 2.38% to 1603p. Analysts at JPMorgan downgraded the stock with a price target of 1000p, which represents a potential downside of 37.6%.
Retailers were also generally lower this morning, retreating slightly from yesterday’s rally. Next was down 1.36%, Kingfisher declined 1.15% and M&S fell 1.37%.
Forex
The upward revision to US GDP in the fourth quarter supported the US dollar this afternoon, pushing the US dollar index 0.28% higher to 75.858.
EUR/USD pared earlier gains as sentiment towards the currency waned towards the afternoon. The euro was trading higher this morning after EU officials agreed to set up a new €500 billion European Stability Mechanism (ESM) to commence in July 2013. However, there was scant detail provided, which took the shine off the announcement. Uncertainty over Portugal’s future may limit gains in the euro in the short term.
Sterling continued to decline against the US dollar as it continued to suffer from the downward revision to GDP that was announced in Wednesday’s Budget. Chancellor George Osborne said GDP is now expected to be 1.7% in 2011, which raises the question whether there will be enough economic activity for the government to bring down the nations debt.
AUD/USD hit a new post-float record this afternoon, hitting $1.0277 before settling at $1.0267. The previous high was reached on 1 January when it touched $1.0256. The Aussie dollar is likely to rise further in the short term as the fundamentals underpinning the currency remain very strong. AUD/USD will be supported on better interest rate differentials, heightened demand from foreign direct investment and excellent trade terms with China.
Looking ahead
After a relatively quiet week on the data front, next week sees a number of important economic releases. On Monday, core personal consumption expenditures for February are released, along with personal income and pending home sales.
UK Q4 GDP is due on Tuesday, along with the current account balance and total business investment. US consumer confidence is released in the afternoon.
US non-farm payrolls and manufacturing data from across the globe will be released on Friday.
