US Third Quarter GDP Revised Upward to 3.2%; Yields Firm, Stock Index Futures Turn Negative

U.S. Gross Domestic Product grew at a seasonally adjusted 3.2% annual rate in the third quarter after declining in the first half of the year, the Bureau of Economic Analysis reported in a third and final estimate.

The figures surprised investors who were looking for the final estimate to show economic growth at 2.9%.

The unexpected growth in the third quarter should temporarily allay fears that the country is in a recession after the first two quarters showed contraction.

Despite the stronger-than-expected report, most economists are still predicting a recession in 2023 as a result of the Federal Reserve’s aggressive interest rate hiking, which is designed to cool inflation but inevitably slows economic growth.

In other news, Weekly Unemployment Claims came in at 216K. This was slightly higher than last week’s 214K reading, but well below the 221K forecast.

Market Reaction

The immediate reaction by the financial markets was bearish. Treasury yields firmed and the U.S. Dollar Index edged closer to breakeven as the Euro retreated from its intraday high.

Gold futures fell as rising yields and the U.S. Dollar dampened demand for bullion. U.S. equity futures indexes also plunged, turning negative for the day.

The price action suggests investors are worried that the strong economy will push the Federal Reserve toward more aggressive future interest rate hikes. This wouldn’t be a surprise, however, since Federal Reserve Chairman Jerome Powell warned a little more than a week ago that investors should expect higher rates until inflation gets tamed.