GDP +4.0 Percent. Bond Markets Sharply Weaker, but Holding For Now
- Q2 GDP +4.0 vs +3.0 forecast
- Q1 revised to -2.1 from -2.9
- Consumer Spending +2.5 vs +1.2 previously
- Business Inventory Change +$93.4 bln, adds 1.66% to GDP, biggest contribution since Q4 2011
Naturally, bond markets are much weaker on the strong data. 10yr yields rose a quick 4bps to 2.50+ and MBS fell 8 ticks to 102-08 (Fannie 3.5s). For now, however, that's as far as the selling has gotten, and there's a fighting chance that we bounce here. Time will tell.
4.0 vs 3.0 may seem like a big beat, but to reiterate something in this morning's Day Ahead, that 3.0 was potentially artificially lower than it otherwise would have been. Here's the relevant part:
"This is a classic case study in market psychology! Human psychology even! You've perhaps heard of "the bump" when it comes to sales negotiations. This is no different. The ridiculously low print for Q1 has market participants broadly convinced that today will be worse than they otherwise would predict."
In fact, the range of forecasts went as high as 5.2%! 4.0 may well have been closer to objective reality, had forecasters not been so scarred by the -2.9 in Q1 (now revised to -2.1).
While the selling pressure is minimal so far, it sets us up for a bit of an uphill battle over the next 2 days. The burden of proof now falls to the bond bulls, and we'd need a friendly FOMC Statement this afternoon (that would be one that doesn't say anything new, basically), and a 'miss' on Friday's payrolls numbers.