So, now what?
Today’s 3.4% advance estimate of second-quarter gross domestic product arrived a touch short of the 3.5% forecast that the dismal-science consensus called for, and landed even further astray of the 3.8% pace registered in the first quarter. But today’s GDP report wasn’t weak enough for the bond market, which quickly interpreted this morning’s data as being more of the same, namely, the continuation of an economic expansion that’s been rolling along.
That’s not what the fixed-income set wanted to hear, considering the recent sentiment in the bond-trading pits that lower yields were reasonable since many in those quarters assumed that the economy was poised to stumble. But no one was talking stumbling today amid the trading of the benchmark 10-year Treasury Note, whose yield pressed upward today, to slightly above 4.28%, the highest close since May 9.
The fact the U.S. economy has been consistently expanding at a rate north of 3% for nine consecutive quarters is now receiving more than mere yawns from bond land. The question is whether today’s GDP report is the straw that finally breaks the bond bulls’ collective backs?
It may very well be, suggests Tony Crescenzi, chief bond market strategist at Miller Tabak + Co., who moonlights as a columnist for TheStreet.com. Dispensing his opinion today in said digital medium, Crescenzi today lays it out straight: “Today’s report on the second-quarter’s gross domestic product clearly indicates that the U.S. economy is poised for additional strong growth in the quarters immediately ahead.”
Meanwhile, Joseph LaVorgna, senior dismal scientist at Deutsche Bank, surveying today’s economic news sums up the latest advance of GDP thus: “We would hardly categorize this as a weak quarter,” noting that quarterly GDP growth has averaged 3.4% for the past 10 years.
The bond market seems inclined to agree, for the moment. Yet, one day a trend reversal does not make. Indeed, recent history proves, if nothing else, that the fixed-income market is a persistent system, particularly when it comes to thinking twice about jumping off the long-running train of bidding prices higher for debt securities, and the corresponding action of pushing their yields lower. As such, it remains to be seen if the bond-market sentiment today will carry through on to next week, next month, and next year.
For what it’s worth, the stock market is taking the 3.4% GDP rise as something more than trivial in the matter of influencing the future path of interest rates. The S&P 500, closing at 1234 today, shed three-quarters of a percent in the session, a sign that some observers say isn’t necessarily unrelated to renewed anxieties in the bond market. “I just don’t see the [S&P 500] hitting 1300 without a clear sign that the Fed is going to stop raising rates,” Brian Barish, president of Cambiar Investors, a Denver money manager, tells Bloomberg News today.
On that note, perhaps Monday’s release of the ISM Manufacturing Index will bring fresh clarity as to what the Fed has in mind when it convenes next, August 9, on the matter of interest rates. As PIMCO’s resident Fed strategist, Paul McCulley, advises, the ISM Index is a crystal ball of sorts in the game of predicting the future path of the Fed funds rate. By that reasoning, followers of the ISM will be all eyes when the July update for the index hits the streets on Monday. The question du jour will be whether June’s ISM uptick, coming after nearly a year of mostly declines, is an orphan or the start of renewed upside momentum in manufacturing, and by extension the economy.