The Day Ahead: Digesting The German Court Vote, Auction Cycle Begins, Gearing Up For FOMC

In terms of market-moving data, today we finally arrive at the first day of two most significant days of data and events since the last FOMC and ECB Announcements.  Tomorrow continues to be "the biggie" in that it contains the trio of FOMC events (announcement, forecasts, press conference), but today is no slouch.

The biggest event of the day (or the biggest red herring) is the German Constitutional Court's announcement of their decision on ESM and Euro Zone fiscal pact.  It's unlikely that they'll simply say "sorry, this just isn't gonna work for us," and markets are well aware that it's not the YES or NO that is the interesting news here.  The importance of the decision is that it should lay out conditions for Germany's participation in the ESM (Europe's permanent bailout fund). 

The reason that Germany's conditions are important and the reason that they'll be considered by the ECB and Euro-zone before any bold decisions is that the ESM would essentially be worthless without German participation, not only because they're the biggest backer, but also because of the precedent set by their abstinence.  It would be yet another death knell for the Euro.  This is precisely the reason they won't simply say "no thanks," and precisely the reason that other Euro-zone entities will make sure to respect the court's decision.  That, and we hear they'll be deviating from their regular attire for today's decision.

But the court decision is announced at a bright-and-early 4am Eastern Time, and thus will already have begun to exert whatever push or pull on bond markets it might have in the overnight session.  It could be big.  It could be disappointing.  It could be greeted by a subdued response in light of tomorrow's FOMC events.  Or it could have already played out by the time you read this. 

Whatever the case, it leaves the remaining domestic economic data as something of a marginalized afterthought. Import and Export Prices hit at 8:30am and Wholesale Inventories at 10:00am, neither of which are significant market movers of late.  Then the 10yr auction--normally a very big deal--arrives at 1pm.  This could still be a very big deal, but if we had to pick one 10yr auction this year to be overshadowed by the juxtaposed market events, this would be it.  As such, it will take a fairly big miss in terms of the auction's stopping yield vs the 1pm "when-issued" yield in order to register a significant response.