Second-quarter U.S. GDP rose above expectations in the preliminary report, rising to 3.3% from the previously reported 1.9%, the Bureau of Economic Analysis reported on Thursday.

Economists were expecting a revision to 2.7%. First-quarter growth in 2008 was 0.9%. Exports advanced by 13.2% in the revision, up from the originally posted 9.2% gain, while imports fell by 7.6%, following the former 6.6% decline. Imports are a subtraction in GDP, so the contraction helps improve the headline GDP figure.

Paul Ferley, assistant chief economist from RBC Capital Markets, expects GDP growth to have peaked for the year. "The prospects of weakening growth going forward is expected to keep the Fed on the sidelines maintaining a still stimulative 2.00% Fed funds rate," wrote Ferley. "Our forecast assumes that this will continue to be the case through the middle of next year before this interest rate starts to be gradually raised."

Markets are currently pricing in an 81% chance that there will be no change to the Fed funds rate for the meeting scheduled for October 29. The expectation has remained unchanged from a day ago.

Initial claims for unemployment benefits in the United States were in line with expectations, dropping further to 425k in the week ending Aug. 23, the Department of Labor reported on Thursday. Continuing claims rose to 3.423 million for the week ending Aug. 16. Forecasts were for initial claims to fall to 425k this week, following last week's upwardly revised reading of 435k.

Economists from RDQ see the fact that initial jobless claims have been above the 400,000 mark for six straight weeks as an indication that the U.S. economy is on the verge of a recession.

"The longer this continues, the less plausible the argument that this is a quirk related to the extension of unemployment benefits. Moreover, the total number claiming benefits hit the highest level since November 2003," wrote economists at RDQ. "The claims data continue to look like outright recession and point to a sharp fall in jobs in August."

Markets are pricing in a 77.9% chance that rates will remain on hold until year-end, unchanged from a day ago.

Markets are looking for a 20.4% chance that the Fed will raise rates by 25 bps for the year-end FOMC meeting scheduled on Dec 16. One month ago, markets were pricing in a 45.3% chance of a 25 bps rate hike.

By Steve Stecyk, This email address is being protected from spam bots, you need Javascript enabled to view it , with contributions from Stephen Huebl, This email address is being protected from spam bots, you need Javascript enabled to view it , edited by Sarah Sussman, This email address is being protected from spam bots, you need Javascript enabled to view it

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