US 3Q GDP Surpasses Expectations, Yet Supply Concerns Cast Shadows on USTs

US 3Q GDP beats, but supply remains a key driver for the USTs

Just ahead of the ECB, the US 3Q GDP data showed the economy expanded by 4.9%, beating expectations. Markets, though, know that this is hardly sustainable and had more of an eye for the cooler-than-expected quarterly core PCE figure coming in at 2.4% versus 2.5%. This means a downside to the consensus that currently sees a hotter September figure. In other data, we note that initial jobless claims were only a tad higher, but continuing claims have extended the past month’s steady move higher. 

It was interesting to see a bull steepening of the US Treasury curve again. Since the Fed has started to indicate that long-end rates were doing part of the Fed’s work, we have seen more instances of bull steepening. But a bull flattening soon followed: A solid 7Y auction had triggered an outperformance of long-end bonds. This reaction serves to highlight the sensitivity to US supply concerns, seen as a key driver of rising term premium. The next key event here is the upcoming quarterly refunding.    

 

Today's events and market view

The ECB played out slightly more dovish than anticipated. In the coming days, ECB officials will add their personal flavours to the event as usual. But more importantly, next week’s data including the flash CPI for October as well as Q3 GDP growth, could help underpin the dovish tone early in the week.    

However, in longer tenors, US rates should remain in the driving seat. And here there will be a lot to digest starting mid-week with the FOMC meeting, quarterly refunding announcement, ISMs and jobs data.

As for today’s data, the focus is on US personal income and spending data and the PCE deflator, but much can already be backed out of yesterday’s GDP data.