Good Monday AM,
Bonds are up slightly on the day with a bit of a bullish feel. The news today was a nonevent with Durable orders coming in as expected. This is a huge news week, perhaps one of the biggest in over a decade, as the market holds its breath in anticipation of seeing the GDP numbers for the second quarter, on Friday. It will not be pretty and now that the virus is pushing more people out of work and more business bankruptcies, investors may start showing less enthusiasm for the third quarter. All of this should pressure the equity markets and lift the bond markets.
I am including a great piece by Matt Graham today as a primer for the week:
As far as weeks with plenty of potentially relevant scheduled events on tap, this one does not disappoint. The only question is how much markets will care about anything other than major coronavirus developments.
Fed Meeting Wednesday
The Federal Reserve’s Open Market Committee (FOMC) will meet on Tue/Wed, culminating in the 2pm release of a new policy announcement on Wednesday. There’s not much we can imagine the Fed could say that we haven’t already heard and very little risk of any chances to existing policy measures. To be sure, there’s zero chance of a change to the Fed Funds Rate and effectively no chance of a change to the only other thing we really care about: the Fed’s bond buying program. That means it’s up to Powell’s press conference to offer up digestible and actionable information. In that regard, markets may attempt to take something from Powell’s perceived tone and/or the extent to which he’s emphatic about committing to the ongoing nature of accommodation efforts.
Advance GDP Thursday
There are three flavors of GDP data: Advance, Preliminary, and Final–in that order. Thursday’s Advance release offers our first look at the much-discussed Q2 numbers–the ones that are expected to bear the brunt of the impact from covid-related lockdowns. Markets are already well-positioned for a terrible number, but it will nonetheless be interesting to see if there is any reaction to the number if it happens to fall far from the forecast.
Treasury Auction Cycle
This is always a potential market mover, but one that frequently doesn’t live up to that potential. Treasury will auction off nearly 100 billion dollars of 2 and 5-yr notes on Monday followed by 7yr notes on Tuesday. If these auctions are well received, it would reinforce the generally positive underlying investor sentiment seen in the bond market since mid-June when we entered the prevailing downtrend in yields (albeit a gentle and decreasingly volatile one). Once again, the downtrend collides with the 0.58% range boundary in 10-yr yields. If bonds find the strength to break this floor this week, we’d be looking for them to do so by more than a few bps in order to infer much meaning.
For a more detailed discussion on the nuances of month-end trading considerations, check out this primer. The short version of the story is that certain traders are required to make certain trades before the end of any given month regardless of the econ data or other market movers in play. These compulsory trades can give the impression of seemingly random trading motivations, but are rarely enough to cause a major shift in momentum that lasts more than one day.
Same Old Story
Apart from all of the above, the headline news regarding coronavirus (and to a far lesser extent, US/China trade relations) will continue to be responsible for any significant acceleration or reversal of recent trends. There are also Wall Street earnings reports to consider. While these are a far bigger deal for stocks, bonds could still be affected if the stock market reaction is big enough.
Please remain safer and stay healthy, make today great!