Economic news Monday morning leaves traders uncertain, resulting in volatile trading. A number of important reports have been released the past two days, but the results have been anything but definitive about the economic recovery. Thursday saw stocks rally following the release of third quarter GDP, but Friday's data has not provide the same result.

GDP in the third quarter rose 3.5 percent, which was above expectations for a gain of 3.0 percent. This also was the first quarter of growth since the second quarter of 2008, which was a result of tax rebate checks. Gains in personal consumption, inventory investment and residential fixed investment provided strength. A downturn in state and local government spending and a rise in imports kept gains from being even strong.

Real GDP was also higher than expected thanks to a lower than expected rise in the GDP price index. This component rose 0.8 percent, well below estimates for growth of 1.4 percent. Residential investment saw a major improvement, rising 23.4 percent in the quarter, its first rise since a 2.6 percent gain in the second quarter 2006. The cash for clunkers program also helped, adding 1.66 percentage points to GDP in the quarter. Year on year, real GDP improved to down 2.3 percent from a minus 3.8 percent in the second quarter.

Jobless claims improved slightly the week ending Oct. 24 to 530,000. This wasn't quite as good as estimates for a reading of 525,000, but did push the four-week moving average to 526,260. This is nearly 20,000 claims better than the year ago period. The best news in the report was the sharp decline in continuing claims for the week ending Oct. 17. Claims fell by 148,000 to 5.797 million, their first reading below 6 million since April. Nonetheless, traders remained concerned about the jobs market with most economists not expecting improvements in payrolls until later in 2010.

Personal incomes were flat in September compared with August and were down 2.8 percent year on year. Consumer spending fell 0.5 percent, as expected, following a 1.4 percent gain in the prior month. Year on year, spending came in at a decline of 0.3 percent. The decline in spending was mainly due to the end of the cash for clunkers program. Inflation pressures were minimal with the core PCE price index rising just 0.1 percent month on month and up 1.3 percent year on year.

Business activity in the Chicago region improved in October as measured by the Chicago PMI. This index rose to 54.2 during the month, up from 46.1 in September and above estimates for a reading of 48.5. Bad news continued to come from the employment component though, down half a point to 38.3. A reading of 50 is the line in the sand between contraction and expansion. Now the focus turns to the ISM Mfg. Index due out next week.

The employment cost index rose 0.4 percent, matching the second quarter and a tenth below expectations. The ECI was flat compared with the year ago period. This data isn't getting much attention since it shows little reason for policy workers to be worried about wage inflation.

The Reuters/University of Michigan consumer sentiment report beat expectations, rising to 70.6 in October, up from 69.4 in the mid-month reading. However, the index fell from the 73.5 reading seen in September. Nonetheless, sentiment is up 13 percent from the year ago period, though well below readings above 80 seen before the recession started. At least this report eased some concerns about sentiment following a disappointing Conference Board report earlier in the week. Inflation expectations rose a tenth to 2.9 percent from the mid-month reading, but are up 7-tenths compared with September thanks to a rise in gasoline prices.

Next week will be full of key economic data, culminating Friday with the release of the October employment report. Other data that will get attention includes the ISM Mfg. Survey and the FOMC statement. A change in rates isn't anticipated, but what the committee has to say about the state of the economy could have a major impact on trading.

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