GDP Falls Short

The major economic events this week were generally bond friendly. The US GDP data fell short, the Fed statement was very similar to the prior one, and core inflation declined in the Eurozone. As a result, mortgage rates continued their move lower.

The performance of the key components of GDP were mixed during the fourth quarter. Consumer spending was a bright spot, rising at the fastest pace in almost nine years. Business investment was weak, however, and exports were hurt by the stronger dollar. Mortgage rates improved a little on the news, but it is hard to read too much into the report considering the size of recent revisions. Three months ago, the first reading for third quarter GDP was 3.5%. 

Wednesday's Fed statement was very similar to the December 17 statement, and it offered few new clues about the timing of the first fed funds rate hike. Fed officials appear to want to wait and see the performance of the economy in coming months before signaling a policy change. The two primary changes in the statement included an upgrade to the Fed's description of the economy and the explicit acknowledgment that international events will be a factor in future Fed policy. Bond investors reacted positively to the lack of surprises from the Fed.

Next week, the important monthly Employment report will be released on Friday. As usual, this data on the number of jobs, the Unemployment Rate, and wage inflation will be the most highly anticipated economic data of the month. Before that, Core PCE inflation and ISM Manufacturing will be released on Monday. The ADP Employment Change and ISM Services will come out on Wednesday. Personal Income, Productivity, Construction Spending, Factory Orders, and the Trade Deficit will round out the schedule. 

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