ECB And Data Help Restore More Logical Trading Ranges

Today began with bonds in moderately weaker territory after token defensive positioning following a solid rally and ahead of the week's more consequential events.  As those events hit the wires between 815 and 915am ET, bonds moved back to positive territory.  The ECB announcement started the party.  Additional help came from several components of domestic economic reports hiding beneath the headlines. 

Here's a broad overview of GDP components from BEA:

There's a massive amount of additional granularity in the report though.  For example this is just one of the 17 pages:

Incidentally, that page shows "net exports" accounting for 2.77% of growth, and several other raw numbers depicted in the chart above (i.e. exports at 1.6, imports just over 1%, etc).  The consumer spending category looks good enough on the first chart, but how does that 1% stack up to the recent track record?  Spoiler alert: this key measure of domestic, non-government spending is showing the slowest growth since before covid.

In other words, the 2.6% GDP reading conveys an outsized level of growth due to the mix of internal components--especially imports and exports.  Imports have been in negative territory since the start of the pandemic and just turned positive this quarter.  Exports were massively bolstered by an exceptionally strong dollar. 

In separate data, the component of the durable goods report that measures spending outside the defense and aircraft sectors fell by 0.7% after being up 0.8% last month.  Moreover, that 0.8% gain was a downward revision from 1.4% previously. It's not entirely uncommon for this number to dip into negative territory, but it is nonetheless a positive anecdote for the bond market, all other things being equal. 

Taken together with the "dovish hike" from the ECB, the morning's economic data prompted another shift in Fed Funds Rate expectations.  We're not yet back to levels seen before the most recent CPI data, but we've more than retraced the capitulatory selling seen in the 2nd half of last week.

That same capitulation went hand in hand with longer term rates breaking up and out of their previous sideways range.  Against this backdrop, this week's gains are more about restoring more logical levels and less about a puzzling new rally.  If anything, it was last week's selling that was unwarranted.