Positive US GDP Takes Backseat to Geopolitical Events in the Middle East as Russia/Turkey Incident Dominates Headlines

Equities fluctuated while oil and Treasuries rallied off the back of increased turmoil in the Middle East.  The main development was news that Turkey shot down a Russian warplane flying close to the Syrian border.  The Turkish military claims the Russian jet was in violation of its airspace and ignored repeated warnings, while Moscow denies the plane ever left Syrian airspace.  This event is noteworthy because Turkey is part of NATO, whose member nations are mandated to defend one another from aggression, which could further complicate relations in the region.  This marks the first time a NATO member’s military had downed a Russian / Soviet plane since the 1950’s.  Putin called the act a “stab in the back by the associates of terrorism” that will have “serious consequences for Russian-Turkish relations”.  There was optimism after the Paris attacks that Russia would work more constructively with the West to reach a political solution in Syria and focus attacks on ISIS, but this incident seems to put this hope for greater coordination in doubt.  Also adding to the geopolitical uncertainty, Brussels remains on the highest-level terror alert and the US State Department issued a global travel alert for Americans.  Treasuries have rallied about 1bp in the front end and belly as a result, while swap rates are actually higher due to a widening of swap spreads, which have bounced off the historically low current levels.

The geopolitical events overshadowed economic reports that showed an improving US economy.  The second reading of Q3 GDP showed the US grew at an annualized pace of 2.1%, in line with expectations and up from a prior reading of 1.5%.  The main source of the upward revision was a smaller drag from inventories, which was partially offset by a downward revision to consumer spending on services for the period.  GDP above 2%, despite the hit to exports from a stronger dollar and slowdown in growth abroad, coupled with the robust October payrolls report, would seem to further strengthen the argument for a December rate hike.

There are no scheduled Fed speakers today, but the Treasury market gets supply in the form of a $13 billion 2-year FRN auction and $35 billion 5-year note auction.