Strong GDP Revisions Drive Equities, Leave Bonds and FX Unchanged

How Did the Markets React? 

Markets seemed relatively unimpressed by the day’s economic data, sending bond yields and the US dollar lower in the time following the release. The buying pressure in US bond markets was enough to send 10-year yields below the psychologically significant 4.5 percent mark for the second time in as many days. Momentum was clearly not enough to send yields or the US dollar lower following later economic data, however, as both instruments posted modest rebounds on the release of the New Home Sales report. The seemingly counterintuitive reactions left both instruments nearly unchanged on the day. In the meantime, renewed bullish interest in US corporate stocks sent the S&P500 futures contract through the psychologically significant 1400 mark following the morning’s GDP report. Given diverging price moves across asset classes, questions remain as to whether equities can continue to rise in the face of rallying bonds and a falling dollar. Tomorrow’s data should clarify outlook on the US economy, with domestic markets weighing in the balance.

Bonds – US 10-year Treasury Note Futures

Bond saw a good deal of volatility through morning trade, with premiums posting seemingly counterintuitive reactions to economic data. Traders sent futures on the 10-year Treasury Note considerably higher despite the strong upward revision to GDP growth, with yields on the actuals dropping below the psychologically significant 4.5 percent mark ahead of New Home Sales. Momentum was clearly not enough to take premiums above significant resistance near 109-00, with intraday charts showing an abrupt reversal at yesterday’s highs. The subsequent drop in new home sales was not enough to push bonds through significant price levels, with yields actually gaining in the moments that followed. Indeed, with a 3.2 percent decline on the month, it stands to reason that bond futures would reflect bearish expectations of US growth. Traders seemed hesitant to breach stiff resistance ahead of more US data to come, with both US Personal Income and Spending due after tomorrow’s New York open. We could see a good deal of volatility on any surprises, with risks of bond yields falling below 4.5 percent weighing on US dollar markets.

FX – EUR/USD

Should an outsider look at the chart of the EURUSD from this morning’s New York session, few would be able to tell that a few big economic indicators hit the newswires.  The fickle dollar has passed through its third session with no sign that volatility will return to levels seen last week.  The stable movement of the dollar-denominated majors is deceptive however, as a fully stocked economic calendar has wrenched the fundamental arm of the world’s most liquid currency.  Today, the indicators in question were a second revision of third quarter GDP and October’s new home sales.  Historically, FX traders have paid little heed to revisions to big quarterly reports, GDP included.  Traders in all the markets were already soured on US growth from the original release’s three-and-a-half year low 1.6 percent print.   When the Commerce Department reported a bigger than expected upward revision to a 2.2 percent pace of growth for the period, the change caught the masses off guard.  It took only a few moments before a dollar bid was found and the EURUSD was pushed 20 points lower 1.3130.  Ever the astute mass of traders though, the dollar bullishness was quickly turned on its heels and the pair rallied 45 points when a closer look at the number revealed the improvement was largely found in the inventory levels – unfavorable conditions for businesses in following quarters who need to work the stock off.  The waves following the housing numbers were even less convincing for the market, though they held a decidedly worse tint for the economy.  Sales of new homes contracted 3.2 percent for the period while inventories of freshly completed residences grew to record levels.  Instead, the ship held steady with the fact that the median price for housing in the index jumped 13.9 percent to $248,500.  With the currency market unusually numb to big economic releases, the big levels in many of the majors will begin to come into question.

Equities –  S&P 500 Index Futures

Though treasury and currency traders were unsure about today’s economic data, those in the equity market were confident in bidding shares on the news.   From the data coffers came a surprising revision to the third quarter GDP report.  Expected to edge 0.2 percentage points higher to 1.8 percent, the number was in fact a substantially higher 2.2 percent pace.  This picked the important gauge up from a three-and-a-half year low to a mere three quarter low.  Another reason to take the change as a positive turn was the improvement reported in the fixed investment component of the gauge, which is expected to be a bigger contributor to growth in the months ahead.  Since the print came before the open of US capital markets, the responsibility of the initial response fell to the S&P 500 futures market which drove the contract 3.4 points higher in the twenty minutes that followed.  The lull that followed was deceiving as the influx of liquidity with the open of the stock exchanges provided a second wind.  In the largely untested rally in the S&P contract through 16:10 GMT, 10.9 points was captured by the bulls to bring the index to 1,402.3.  A substantial 0.6 percent retracement sapped some of the strength in the market as traders took profit and weighed in on the mixed housing report; but the bulls won out in the in.  A follow through rally took the futures contract all the way to the 1,404.30 high just before the close of the session for a 0.9 percent advance on the day.