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NOT A RALLY, BUT A LIFT - By Jennifer Coombs

While not a sizable rally, the major equity indices are getting some relief today following the slightly higher-than-expected final revision to the second quarter gross domestic product (NYSEMKT:GDP). The Dow Jones Industrial Average in particular is getting a sizable lift primarily due to a huge pop in shares of Nike (NYSE:NKE) after the company posted better-than-expected results last night and gave an optimistic business outlook. There was also good news out of China as the country's official manufacturing PMI hit 51.2, up 0.1 points from August. It's a bittersweet end to the week's stock activity, but the data released today is setting up some optimism for the end of September, and effectively the end of the third quarter.

We mentioned the improvement in US GDP this morning; however we wanted to offer a few more details. As we noted, the final revision to Q2-2014 GDP was revised higher to 4.6% from the prior estimate of 4.2% and substantially higher compared to the -2.1% reading for Q1-2014. The upward revision was also in-line with economists' expectations and primarily came from growth in nonresidential fixed investment, residential investment, and exports. In addition, personal consumption was also healthy (evidenced also in the University of Michigan's reading on consumer sentiment). Prices expressed through the GDP deflator advanced 2.1% annualized, equaling the prior estimate and forecasts, compared to the Q1 number of 1.3%. Overall, the general picture of improving economic strength during the second quarter has not changed. In fact, it was easy for components to show improvement, especially in inventories and construction, after such a harsh winter. However, the rebound effect will show up little, if at all, in the third quarter and a more moderate number, at least in our view, is to be anticipated.

The consumer is making a comeback as well: the University of Michigan noted that consumer sentiment finished out the month of September precisely at consensus' estimate of 84.6. This is the same level expected at mid-month, but is higher from the 82.5 final reading in August. There was a surprise gain in the expectations component, which came in at 75.4 for September, up 4.1 points from August. This is indicative of improvement in the outlook for jobs and income. The current conditions component ended up declining 0.9 points to finish September at 98.9. We note that this dip does not point to any strength for current consumer spending nor does it point to strength for the September jobs data. The dip in current conditions cannot be blamed on inflation either as the 1-year expectation for inflation declined 0.2 from August to 3.0%. For 5-year expectations, inflation expectations declined 0.10 to 2.8% which reflects a major price contraction already underway due to the decline in oil and gas prices. Less money spent at the pump and less energy used in manufacturing ought to lead to an overall decline in prices in the near-term. However, the consumer sentiment index has a long way to go to match the same level of optimism in the S&P 500… in spite of the market pullback yesterday.