US close: Stocks regain ground after GDP surprise, Fed speakers bullish

US stocks and the dollar both regained further ground on Thursday following news that the country’s economy grew more than expected last quarter, with Federal Reserve speakers adding to the breezy mood.

The Dow Jones Industrial Average closed up 0.3% to just above 20,728, the S&P 500 added 0.3% to a little over 2,368, while the Nasdaq finished 0.29% firmer at a touch more than 5,914.

The dollar was also higher, with the greenback up 0.8% against the euro to 0.936 and 0.77% higher versus the yen to 111.89.

However, the euro was under pressure after the latest inflation numbers from Germany came in sharply below expectations.

Dollar traders got the wobbles when it emerged President Donald Trump was still studying ways to penalise currency manipulators but the greenback regained its poise thanks to the final reading of US gross domestic product for the fourth-quarter of 2016, which was revised up to 2.1% from 1.9%.

GDP was boosted by an upgrade in personal consumption to 3.5%, while core personal consumption expenditures was also revised higher to 1.3% from 1.2%, which is below the Federal Reserve’s 2% target.

This very respectable final reading shocked markets, said analyst Joshua Mahony at IG.

"Today’s US GDP reading goes a long way to justifying the recent decision from the Fed to raise rates. With rate setter Eric Rosengren calling for a hike every other meeting, we could see another rise sooner than many think," he said.

Indeed Cleveland Fed president Loretta Mester, speaking in Chicago later in the day, said the economy was on solid footing and any weakness in the first three months of the year was just a speed bump.

“While growth in the first quarter may come in on the weak side, I think this largely reflects transitory factors and residual seasonality in the data,” Mester said, adding she expects GDP growth for the year to be above 2% that will lead to a “sustained” increase in inflation to the Fed’s target.

San Fransisco colleague John Williams agreed the US was what he called a “Goldilocks economy” – one that doesn’t run too hot or too cold. "We want the porridge to be just right."

He predicted the unemployment rate will drift down two more percentage points to around 4.5% by the end of the year and that agreed with Mester that inflation will reach the Fed's goal of 2% a year sometime "in the next year or so", but that to prevent the economic porridge from overheating the central bank was only slowly adjusting the gas knob.

Looking forward to the first quarter's GDP, Neil Wilson, senior market analyst at ETX Capital, said the best guess was still hard to establish even as we come to the end of March, with the Atlanta Fed estimating 1% and the New York Fed thinking the number was closer to 3%.

"Split the difference and a steady 2% gain looks okay and in line with the fourth quarter. A healthy 3.5% leap in consumer spending bodes well and chimes with what we are seeing in terms of soaring consumer confidence”, Wilson said.

Oil prices did their part to help the mood, with West Texas Intermediate up 0.92% to $49.97 a barrel and Brent crude up 0.45% to $52.66.

Unemployment data reverted to the mean, as jobless claims dipped to 258,000 from 261,000, slightly above the 247,000 consensus for the week ended 25 March. The previous week’s reading was unchanged.

On the corporate front, Cenovus Energy tumbled after ConocoPhillips said late on Wednesday that it would sell the majority of its Canadian oil sands assets to the company.

Yoga-leggings maker Lululemon Athletica plunged on Wednesday after its fourth-quarter earnings missed analysts’ expectations and it forecast lower profit and sales in the first quarter.