GDP Contraction Cools Forward Hike Expectations

Rates and stocks rallied after this morning's recession metric cooled: U.S. GDP contracted by 0.9% in the second quarter, far below analyst expectations for a 0.4% gain, driven by decreases in inventory investment, housing and government spending, according to Wed's advance est by Bureau of Economic Analysis.

• Short end rallied/yield curves bull steepened (well off high -14.369, 2s10s at -20.337 after the bell) as expectations over another 75bp hike in Sep cool - 50bp looking more likely at the moment but remain data dependent.
• Balance of rates followed suit, setting modest session highs by midmorning, 30YY at 3.0162% after the bell.
• Tsys hold range after $38B 7Y note auction (91282CFC0) stops through (after three consecutive tails): 2.730% high yield vs. 2.735% WI; 2.60x bid-to-cover vs. 2.48x last month.
• Focus turns to Friday's data calendar w/ Personal Income (0.5% est), Personal Spending (0.9% est), ECI (1.2% est), Chicago PMI (55.0 est) and U-Mich (51.1 est.).
• Fed comes out of blackout tomorrow, still no scheduled speakers as yet - but will most likely see some commentary on networks.
• Currently, the 2-Yr yield is down 13bps at 2.8683%, 5-Yr is down 14.8bps at 2.6945%, 10-Yr is down 11.4bps at 2.6705%, and 30-Yr is down 4.8bps at 3.017%.