On the afternoon of the Thursday before last, bond markets had just gone on their run to the best levels in over a month on the geopolitical flare-up (that was the day that begin with the Malaysian Airliner and ended with Israel announcing a ground assault in Gaza). As we discussed at the time, the geopolitical risk situation would have to continue to be as surprisingly negative as it had been on Thursday in order for bond markets to continue past the year's best levels.
While overseas events remained troubling--continuing to offer large-scale tragedy--they didn't offer the same sort of large-scale surprises. With that being the case, each passing moment since then has been building to today. That sounds pretty dramatic, but here's why it's true.
Shocking as it may seem, there is an unwritten code in financial markets during the summer months. This allows the average market participant to look at the calendar of events and almost instantly conclude "oh, that's a vacation week" or "I need to be there for that week." The determination is fairly logical. The closer to mid-month, the fewer the economic reports, the fewer the other events like Fed speakers and Treasury auctions, the more we can be sure markets have already agreed to take the week off.
It's tempting to think about traders tuning out in the same way as a neighboring warlord leaving their castle undefended and ripe for plunder, but that doesn't work for financial markets in most cases. Efficient trading requires a certain measure of liquidity and broad-based participation. Traders know they can't count on that during these 'vacationy' weeks and big-picture movement is put on hold (barring outright disaster anyway).
When there are clearly important events in the following week, markets collectively understand when the next big potential movement is most likely to be seen. It's like Wayne and Garth saying "game on!"
Today is so very clearly that "game on" day that there can be no debate. First of all, any Wednesday that has an FOMC Announcement is always 'game-on.' But that's just the beginning today, or rather, just the end.
Bright and early, the ADP Employment report is a big-ticket event in its own right. While it hasn't been as competent an indicator of NFP this year, it is fresh off a nice 'win' last month (big beat in ADP was a prelude to big beat in NFP). Even then, it's merely the appetizer for tomorrow's main course.
The first reading of Q2 GDP will be released at 8:30am, and it's more important than normal. Indeed there have been many instances of GDP that just don't matter much. This time around, we're not only getting the 'advance' (which is the first reading of a given quarter), but we're also getting the second chapter in 2014's suspenseful saga.
Reason being, Q1 kept moving lower and lower with each revision until the final reading was an appalling -2.9 percent. Market bears nodded with satisfaction. Market bulls had limitless 'yeah buts.' The reality was probably somewhere in between, but the important part is the breadth of dissension it created between those bulls and bears.
The econo-bulls are seeing today's numbers come in over 4%. Bears would be surprised to see it over 2%. That's a wide range of expectations! Unless it comes in right in the middle, one side is going away very hurt and very surprised. For the record, the official range among economists survey by Reuters was 2.3 - 5.2 % as of Tuesday night. The median is 3.0, meaning that most of the audience is betting toward the lower end of the spectrum.
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. That doesn't necessarily mean they'll be wrong, but if they're not, it will have at least something to do with luck. If a strong result catches markets too wrong-footed, it could be all that's needed to solidify the "mid 2.4's" in 10yr yields--at least for now.
The counterpoint to that is that it doesn't seem to make much sense to bet against and ongoing European bond market rally continuing to drag Treasury yields lower until that rally has experienced a profound, confirmed bounce. Considering Germany's 10yr yields were at an all time low yesterday, it's probably JUST a bit soon to be thinking about that.