GDP data strong, but disappoints

Wednesday February 10, 2010

Global yield curves are marginally flatter at the end of a week that delivered fresh economic worries around the world, compounded by fresh signs of smoke in Europe where investors responded to threats of a Greek downgrade. Long yields are firmer in price while short-dated futures contracts are lower by a similar amount. The net effect confirms the response towards flatter yields seen during the week. 

Interest rate expectations continue to focus on near-zero rates for an extended period.

Eurodollar futures - It's hard to determine what reaction interest rate markets should have to Friday's GDP report. The expected upwards revision to fourth quarter growth was in-line with expectations at 5.9% and higher than the preliminary 5.7% reading. The improvement stemmed from a sharp reduction in the pace of inventory declines as businesses realized that stocks were already mean and lean. Final demand data was actually revised lower and portrays a slightly more docile consumer than at first blush. So we have a blistering headline rebound weighed upon by lackluster consumer spending. More recent data has also raised eyebrows as fresh weakness is apparent in the housing market where data for construction and transactions are both pointing to another tepid spring for realtors and builders.

Existing home sales in the U.S. fell 7.2% in January bringing the annualized pace to the lowest reading in seven months. Meanwhile a University of Michigan consumer sentiment reading for February declined at the margin pretty much in line with market expectations. 

All of today's data gives cause for bonds to keep a positive tone sending yields lower. Meanwhile the weaker consumer confidence data and lacking conviction in the housing market was enough to swing Eurodollars from minor intraday losses to gains. March treasury note futures are eight ticks higher at 118-25 to yield 3.62%. The December Eurodollar contract is trading at an implied 0.81% yield.

European short futures - German bunds are pushing intraday heights heading into the final hours of European trading. The March contract is up 14 ticks at 124.44 and is challenging the 124.52 peak of February 2 as investors worry about weekend prospects for negative weekend developments on the Greek story.

British interest rate futures - British growth was also revised higher earlier today with the fourth quarter expansion lifted to 0.3% from 0.1%. But a downward revision to the third quarter data meant a large final quarter contraction of 3.3% compared to the 3.2% announced last month, which offset today's better data. March gilts are ending the session just about unchanged at 115.75 while short sterling futures are about two ticks weaker in price.

Australian rate futures - Aussie bills also dipped just slightly ahead of next week's RBA meeting at which dealers' expectations over an interest rate increases are evenly split. Firm data from Japan overnight indicates ongoing Asian market recovery.

Canada's 90-day BA's -Canadian bill futures are unchanged to higher along the strip with government bond prices once again on the rise as yields fall as the yield curve continues to flatten.

Japan - A recovery for stocks domestically and firm retail sales data helped confidence return a little to Japanese markets. Eyes continue to remain fixed on the Toyota recall. Today's strong reading for industrial production showed a gain for January of 2.6% blowing away a 1.1% forecast but was not enough to change 10-year note yields standing at 1.30%.

Andrew Wilkinson

Senior Market Analyst