Annualized US GDP (1Q P) (12:30 GMT)
Expected: 0.8%
Previous: 1.3%

Annualized Canadian GDP (1Q) (12:30 GMT)
Expected: 3.3%
Previous: 1.4%

How Will The Markets React?

Only two days into this foreshortened week, and the US markets have already had more than their fill of scheduled fundamental releases. However, looking at the docket for the next two days, it’s clear that things are only beginning to get interesting. Thursday sees a number of economic indicators scheduled for release that will cover growth, inflation, employment, manufacturing and housing. Weighing the potential impact that each indicator may have under normal conditions and the most extreme surprises, it is clear that the preliminary revision of the first quarter GDP report presents the greatest risk. In its first go around, the advanced release of the growth report surprised the market; but it had also called the top on EURUSD. Since the April 27th release, the dollar, treasury yields and the benchmark stock indices have rallied on the back of wholly unflattering data. Regardless of the reaction from traders, economists and analysts outlook for the economy clearly slumped in the report’s wake. Looking at the consensus for tomorrow’s revision, the official and unofficial projections for growth in the world’s largest economy could deteriorate even further – perhaps so far as to align market action to overall fundamentals. Heading into the final stretch before the indicator hits the wires, traders are working with official expectations for a cut in annualized growth from an already four-year low 1.3 percent pace to a far lowlier 0.8 percent rate of expansion. This will set the benchmark; yet even a modest divergence from this target could translate into a dramatic reaction for traders. Should the contraction be smaller than suspected, it may allow the dollar and T-note yields to overcome resistance that has built up before the release. A revision that is unchanged or even better – while unlikely – could actually spark a rally even though it is hardly good news for the economy. Alternatively, a disappointment could finally bring market direction back in line with the tepid growth outlook.

Bonds – US 10-Year Treasury Note Futures

Yields have been on the rise for weeks despite a very notable lack of bullish economic data and dimming speculation for tomorrow’s growth revision. In fact, the negative surprise from the advance print of first quarter GDP hardly affected the Treasuries. On April 27th when the Commerce Department reported the slowest pace of growth in the US economy in four years, the active futures contract on the benchmark T-note hardly tested 108-15 resistance before being battered lower. Since then, money has move behind yields and pushed T-notes over 2 percentage points lower. Technicals are clearly setting up a do-or-die scenario. The steep, descending trend channel has come to an apex with growing support just above 106-06. A surprise may very well call the next leg for the T-note.

FX – USD/CAD

While the US dollar strengthened against the euro and British pound on Wednesday, the currency dropped like a stone against the ever-resilient Canadian dollar after Raw Materials Prices surged 3.3 percent, hammering in expectations for July hike by the Bank of Canada. We may continue to see major divergences between the US dollar and Canadian dollar as it becomes crystal clear that expansion in Canada is outpacing that of the US by leaps and bounds. At 12:30 GMT on Thursday, US GDP for the first quarter is predicted to be revised all the way down to 0.8 percent from 1.3 percent, signaling that the sharp economic slowdown from the fourth quarter was far worse than previously expected. At the same exact time, Canadian GDP for the first quarter is anticipated to surge to 3.3 percent from 1.4 percent the quarter prior. While this in and of itself bearish for the USDCAD, the neutral stance of the Fed combined with the hawkish bias of the BOC puts potential interest rate differentials in favor of the Canadian dollar. Given the data at hand, it appears that traders shouldn’t bet on a USDCAD turn quite yet.

Equities – S&P 500 Index

The S&P 500 rose 0.8 percent to 1530.23 today, finally closing above its March 2000 record close of 1527.46, after a jump in oil prices lifted shares of energy producers. Furthermore, traders were clearly ignoring the plunge in the Shanghai index as well as the release of the May 9th FOMC meeting minutes, which indicated that the Fed lists inflation as still being their predominant concern. Exxon Mobil Corp., the world's largest oil producer, jumped $1.38 to an all time high of $84 after crude prices gained. Meanwhile, Goldman Sachs Group Inc., the world's biggest securities firm, led financial shares by gaining $3.56 to $232, serving as the second-biggest contribution to the S&P 500's advance after the FOMC minutes also said that economic growth will pick up.

The S&P 500 may struggle to hold onto its gains tomorrow, as first quarter GDP is anticipated to be revised much lower to 0.8 percent from 1.3 percent. Such a sharp revision is highly bearish for the economy, as well as the equity markets, and could bring the US stock index down for a sharp correction back below 1,500.00. However, if we see that revisions fare better than expected along with encouraging personal consumption data, equities in the US could hold on strong as stock market bulls hope the S&P 500 rally goes on unscathed.

John Kicklighter is a Currency Strategist at FXCM.