Market Insider

Here's why markets should look past negative GDP

Bonds' wild day: Domm

Markets are braced for the first negative quarterly U.S. GDP reading in three years, and they should look past it, despite the buying frenzy in the bond market.

Economists expect to see a negative 0.5 percent print for first-quarter GDP, revised from a first reading of 0.1 percent. First-quarter growth was hampered by severe weather though not everyone is convinced that weather was the only factor.

Deutsche Bank's chief U.S. economist, Joseph LaVorgna, expects to see a decline of 0.8 percent, and he sees weather as the culprit. "That's predominantly based on less construction spending and less inventory investment," he said, noting first-quarter GDP could ultimately be revised to a positive number in the third and final reading next month.

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"I think we're going to see a really big second quarter. I'm at 4.2 percent," LaVorgna said. "The second half of the year is going to be pretty good." GDP is released at 8:30 a.m. ET on Thursday, as are weekly jobless claims. Pending home sales are reported at 10 a.m.

Stocks meandered Wednesday in quiet trading, but all the action was in the bond market. Yields fell dramatically, with the 10-year yielding 2.43 percent, a new 10-month low and well off Tuesday's 2.5 percent. The 30-year was at 3.29 percent in late afternoon trading, an 11-month low. The five-year auction got a mixed reception Wednesday afternoon, ahead of Thursday's $29 billion seven-year auction.

The , meanwhile, slipped 2 points to 1,909, and the Dow fell 42 to 16,633. The Nasdaq was off 11 at 4,225.

Traders on the floor of the New York Stock Exchange.
Getty Images

Even though many traders are blaming factors unrelated to the U.S. economy, the bond market move on the eve of the GDP number was noted by many. "This last wave of the bond market ... that's kind of since the first GDP print," said James Paulsen, chief investment strategist at Wells Capital Management.

Bond strategists said bonds were reacting to global rate moves, in part on concerns about the global economy and also in response to the actions of central banks. The Fed is not expected to raise rates for a long period, and it holds more than $4 trillion in securities on its balance sheet even as it winds down bond buying. The markets have also been moving ahead of the European Central Bank, which is expected to cut rates when it meets next week.

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Traders also say there is still a lot of short covering in the Treasury market, and investors and institutions are buying ahead of the month end.

"I think that's why stocks aren't moving on this. I think people are starting to realize in the data that just came out, that we're going to have a pretty good jobs number," he said. Traders are already speculating the May jobs report, expected June 7, could provide a possible turning point for bonds if it is a strong number.

What to expect from US first-quarter GDP

While bond yields are at new lows for the year, the S&P and Dow are close to record highs. Stocks had initially reacted to the move lower in yields for fear the bond market was forecasting a weaker economy, but in recent sessions the two have diverged.

"I'm putting my money on stocks, but it's quite a divergence," said Paulsen. He said stocks should continue to move higher with improvement in the economy.

"I think we're going higher before we go lower again. I think the second quarter is growing north of 5 percent, and I'm not alone in that," said Paulsen.

—By CNBC's Patti Domm.