Yesterday was obviously bad for bond markets. The shift in tone from the Fed caught many market participants off guard. Since the announcement, Fed Funds Futures have moved to price in better than a 50 percent chance of a December hike versus about a 1 in 3 chance before the announcement.
While it wouldn’t have been unfair to expect traders to take more time to come to terms with the surprise (read: more selling today), bond markets actually began the overnight session holding relatively steady. It wasn’t until the earliest domestic trading activity began that we started to lose ground.
The GDP data didn’t help. Even though the headline was weaker than forecast (1.5 vs 1.6), there was a significant impact from an inventory reduction (1.44 percent). That means GDP would have been closer to 3 percent without the inventory fluctuations. Indeed, the “Final Sales” component was exactly 3.0% versus estimates for 2.8%. Traders often factor out the more volatile month-to-month inventory impact and today was no exception as bonds continued to weaken after the data.
9am brought a dark horse market mover in the form of Germany’s higher-than-expected inflation. Eurozone inflation, in general, has been a big consideration for rates in 2015, and Germany is the biggest component. Bond yields and oil prices surged. The response was far more pronounced compared to GDP half an hour earlier.
By the time the 10am data rolled around, the tradeflow snowball had taken over. No one cared about Pending Home Sales, despite the big miss (-2.3 vs +1.0 forecast). We’re currently pushing the upper limits of an important inflection point at 2.135 (yields are up at 2.156, so obviously, we’d be hoping for a 2bp rally by the 3pm official close).