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What's the Actual Momentum of Growth ?

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Stocks appear on track for a positive open today following a mediocre run in the first few trading sessions of the New Year. Part of that is giveback for the strong gains in December, but we don’t have much on the data front either.

The jobs data later this week and the 2013 Q4 earnings season getting underway next week will likely provide some catalysts for stocks. But we will likely remain in a wait-and-see mode before then.

The monthly trade data isn’t really a market mover, but that’s all we have on today’s data docket. This morning’s lower-than-expected trade deficit number for November maintains the steady movement we have been seeing on this front all year long.

A big driver of the deficit downtrend is lower imports on account of the improved domestic energy scene, but exports have been rising as well. The deficit data feeds into the GDP equation and in that calculation lower trade deficit is a plus for U.S. GDP growth. Today’s lower than expected trade deficit for November means further upward drift for Q4 GDP estimates, which have steadily been moving up in recent weeks.

The consensus estimate for Q4 GDP at the start of the quarter was for growth to be barely above +1%, with the inventory give-back from the prior quarter’s gain doing most of the damage. But a slew of data since then, and not just from the trade deficit side, has been pushing those estimates higher.

Current estimates for Q4 GDP growth are well north of +2% and steadily moving up, though Monday’s service sector ISM numbers came in a bit weaker than expected. All in all, the U.S. economy appears to have shifted to a higher growth pace in the second half of 2013, with GDP growth most likely averaging above +3%. The question going forward will be whether this will prove to be another head fake like the many we have experienced in this recovery or the economy actually turned the corner.

The favorable economic turn appears to validate the Fed’s Taper call and the market’s strong recent momentum. But I strongly believe that Fed wanted to get out of the QE business even in the absence of a growth ramp up. They have a delicate dance ahead  of them and may be unable to control the long end of the yield curve if the emerging growth momentum remains in place.

The stock market will most likely be OK with higher interest rates if accompanied by ramped up GDP and earnings growth. But what if 10-year yields rise to 4% without those accompanying benefits simply because we have stopped playing with the house money? Hard to envision any scenario where the stock market can live with that type of outcome.

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