Bond Market Update

Rate Cut Hopes Pressured by Decent Jobs Report

• U.S. Treasuries had a mixed finish to the week with longer tenors showing relative strength while the 2-yr note lagged after a December jobs report that was good enough to call the market's rate cut expectations into question. The long bond outperformed from the start while the short end started with slim losses. The entire complex faced some volatility in immediate reaction to December Employment Situation report (50,000; Briefing.com consensus 55,000), but all tenors were essentially back at their starting levels two hours after the open. As for the jobs report, it showed slightly weaker-than-expected growth in payrolls while the Unemployment Rate dipped to 4.4% from 4.5% and Average Hourly Earnings growth accelerated to 3.8% from 3.6%. Altogether, this was good enough to cause the market to push back its expectations for the next rate cut from April to June. Accordingly, the 2-yr note spent the second half of the session in a slide to fresh lows, sending its yield past its 50-day moving average (3.527%). The long bond headed in the opposite direction, climbing toward its high from Wednesday while the 10-yr note essentially split the difference, recording a modest gain. Crude oil climbed back above its 50-day moving average (58.65) while the U.S. Dollar Index rose 0.2% to 99.12, reclaiming its 50-day moving average (99.08). The Index gained 0.7% this week.
• Yield Check:
  • 2-yr: +5 bps to 3.54% (+6 bps this week)
  • 3-yr: +5 bps to 3.60% (+5 bps this week)
  • 5-yr: +2 bps to 3.76% (+2 bps this week)
  • 10-yr: -1 bp to 4.17% (-2 bps this week)
  • 30-yr: -4 bps to 4.82% (-4 bps this week)

• News:
  • Today's opinion from the Supreme Court was not about tariffs. The next opinion will be released on January 14, but the subject will not be known until then.
  • The House of Representatives passed a three-year extension of ACA tax credits.
  • The Wall Street Journal reported that China has stopped granting licenses for rare earth exports to Japan. Japan's Finance Minister Katayama is expected to discuss the issue with U.S. officials during a visit next week.
  • TD expects the Reserve Bank of Australia to announce a 25-basis point rate hike in February.
  • European Central Bank policymaker Centeno is reportedly looking to run to replace Vice President de Guindos.
  • China's December CPI was up 0.2% m/m (last -0.1%), rising 0.8% yr/yr, as expected (last 0.7%). December PPI was down 1.9% yr/yr (expected -2.0%; last -2.2%).
  • Japan's November Household Spending rose 6.2% m/m (expected 2.7%; last -3.5%), increasing 2.9% yr/yr (expected -1.0%; last -3.0%). November Leading Index rose to 110.5 from 109.8 (expected 110.4) and Coincident Indicator was down 0.7% m/m (expected 0.5%; last 1.0%).
  • South Korea's November Current Account reached $12.24 bln (last $6.81 bln).
  • Eurozone's November Retail Sales rose 0.2% m/m (expected 0.1%; last 0.3%), increasing 2.3% yr/yr (expected 1.6%; last 1.9%).
  • Germany's November trade surplus reached EUR13.1 bln (expected surplus of EUR16.3 bln; last surplus of EUR17.2 bln) as imports grew 0.8% m/m (expected 0.2%; last -1.5%) and Exports fell 2.5% m/m (expected 0.0%; last 0.3%). November Industrial Production was up 0.8% m/m (expected -0.6%; last 2.0%), rising 0.8% yr/yr (last 1.1%).
  • France's November Consumer Spending was down 0.3% m/m (expected -0.1%; last 0.5%) and Industrial Production dipped 0.1% m/m (expected -0.2%; last 0.2%).
  • Italy's November Retail Sales rose 0.5% m/m (expected 0.3%; last 0.5%), increasing 1.3% yr/yr (last 1.3%).
  • Spain's November Industrial Production was up 4.5% yr/yr (last 1.2%). December Business Confidence fell to -3.5 from -3.2.
  • Swiss December Unemployment Rate remained at 3.0%, as expected.
• Today's Data:
  • December nonfarm payrolls increased by 50,000 (Briefing.com consensus: 55,000). The 3-month average for total nonfarm payrolls decreased to -22,000 from -3,000. November nonfarm payrolls revised to 56,000 from 64,000. October nonfarm payrolls revised to -173,000 from -105,000.
    • December private sector payrolls increased by 37,000 (Briefing.com consensus: 50,000). November nonfarm payrolls revised to 50,000 from 69,000. October private sector payrolls revised to 1,000 from 52,000.
    • December unemployment rate was 4.4% (Briefing.com consensus: 4.5%) versus downwardly revised 4.5% (from 4.6%) in November. Persons unemployed for 27 weeks or more accounted for 26.0% of the unemployed versus 24.4% in November. The U6 unemployment rate, which accounts for unemployed and underemployed workers, decreased to 8.4% from 8.7% in November.
    • December average hourly earnings were up 0.3% (Briefing.com consensus: 0.3%) versus an upwardly revised 0.2% increase (from 0.1%) in November. Over the last 12 months, average hourly earnings have risen 3.8% versus 3.6% for the 12 months ending in November.
    • The average workweek in December was 34.2 hours (Briefing.com consensus: 34.3) versus 34.3 hours in November. The manufacturing workweek dipped 0.2 hour to 39.9 hours. Factory overtime was unchanged at 2.9 hours.
    • The labor force participation rate decreased to 62.4% from 62.5% in November and the employment-population ratio increased to 59.7% from 59.6% in November.
  • Housing starts in October declined 4.6% month-over-month to a seasonally adjusted annual rate of 1.246 million (Briefing.com consensus: 1.340 million). Building permits decreased 0.2% to a seasonally adjusted annual rate of 1.412 million (Briefing.com consensus: 1.355 million).
    • The key takeaway from the report is that the weakness in starts was driven entirely by multi-family units. Single-unit starts were up 5.4% month-over-month and at their highest level since July.
  • The preliminary University of Michigan Consumer Sentiment reading for January increased to 54.0 (Briefing.com consensus: 53.0) from the final reading of 52.9 for December. In the same period a year ago, the index stood at 71.7.
    • The key takeaway from the report is that consumer sentiment, while improved a bit, is still guarded due to lingering concerns about high prices and softening labor markets.
• Commodities:
  • WTI crude: +2.3% to $59.10/bbl
  • Gold: +0.9% to $4501.00/ozt
  • Copper: +1.7% to $5.90/lb
• Currencies:
  • EUR/USD: -0.2% to 1.1635
  • GBP/USD: -0.2% to 1.3408
  • USD/CNH: -0.1% to 6.9766
  • USD/JPY: +0.7% to 157.90
• The Week Ahead:
  • Monday: $58 bln 3-yr Treasury note auction results at 11:30 ET and $39 bln 10-yr Treasury note auction results at 13:00 ET
  • Tuesday: December NFIB Small Business Optimism Index (prior 99.0) at 6:00 ET; December CPI (Briefing.com consensus 0.3%; prior 0.2%) and Core CPI (Briefing.com consensus 0.3%; prior 0.2%) at 8:30 ET; September New Home Sales (Briefing.com consensus 710,000; prior 800,000) at 10:00 ET; $22 bln 30-yr Treasury bond reopening results at 13:00 ET; and December Treasury Budget (Briefing.com consensus -$223.0 bln; prior -$173.0 bln) at 14:00 ET
  • Wednesday: Weekly MBA Mortgage Index (prior -9.7%) at 7:00 ET; November PPI (Briefing.com consensus 0.2%; prior 0.3%), Core PPI (Briefing.com consensus 0.2%; prior 0.1%), November Retail Sales (Briefing.com consensus 0.4%; prior 0.0%), Retail Sales ex-auto (Briefing.com consensus 0.3%; prior 0.4%), and Q3 Current Account Balance (prior -$251.3 bln) at 8:30 ET; December Existing Home Sales (Briefing.com consensus 4.15 mln; prior 4.13 mln) and October New Home Sales (prior NA) at 10:00 ET; and weekly crude oil inventories (prior -3.83 mln) at 10:30 ET
  • Thursday: Weekly Initial Claims (Briefing.com consensus 210,000; prior 208,000), Continuing Claims (prior 1.914 mln), January Philadelphia Fed survey (Briefing.com consensus -5.0; prior -10.2), January Empire State Manufacturing survey (Briefing.com consensus 1.0; prior -3.9), and November Import/Export prices at 8:30 ET; weekly natural gas inventories (prior -119 bcf) at 10:30 ET; and November Net Long-Term TIC Flows (prior $17.5 bln) at 16:00 ET
  • Friday: December Industrial Production (Briefing.com consensus 0.2%; prior 0.2%) and Capacity Utilization (Briefing.com consensus 76.0%; prior 76.0%) at 9:15 ET; and January NAHB Housing Market Index (Briefing.com consensus 40; prior 39) at 10:00 ET

Divergence on Display

• U.S. Treasuries have seen some divergence since this morning's release of the December jobs report with the 2-yr note sliding to a fresh low while the long bond has climbed to a fresh high. The entire complex was back near today's starting levels about two hours after the open, but the market has diverged since with 2s slipping in steady fashion while the long bond has climbed just as steadily. The underperformance up front comes as the market reconsiders its rate cut expectations. The fed funds futures market was pricing in the next cut for April, but expectations for the next cut have now been pushed to June. This makes for a notable shift from one week ago, when the market speculated that the next cut could come as soon as March. On a side note, the Supreme Court opined today, but not regarding tariffs. The Court will release its next opinion on January 14, but the subject will not be known until that day.
• Yield Check:
  • 2-yr: +4 bps to 3.53%
  • 3-yr: +4 bps to 3.59%
  • 5-yr: +2 bps to 3.76%
  • 10-yr: -1 bp to 4.17%
  • 30-yr: -4 bps to 4.82%

Opening Range Maintained

• U.S. Treasuries remain near their starting levels after seeing some volatility during the first hour of action. Treasuries slid to lows in immediate response to the December Employment situation report, which showed below-consensus headline nonfarm payrolls growth (50,000; Briefing.com consensus 55,000), but also included a dip in the Unemployment rate (to 4.4% from 4.5%) and an acceleration in the year-over-year average hourly earnings growth (to 3.8% from 3.6%). The post-data dip was followed by an immediate bounce and a second return to lows that also found support. Equities are higher in the early going with the S&P 500 (+0.5%) extending this week's gain to 1.4%.
• Yield Check:
  • 2-yr: +2 bps to 3.51%
  • 3-yr: +2 bps to 3.57%
  • 5-yr: +1 bp to 3.75%
  • 10-yr: UNCH at 4.18%
  • 30-yr: -1 bp to 4.85%

Data Recon

• The preliminary University of Michigan Consumer Sentiment reading for January increased to 54.0 (Briefing.com consensus: 53.0) from the final reading of 52.9 for December. In the same period a year ago, the index stood at 71.7.
  • The key takeaway from the report is that consumer sentiment, while improved a bit, is still guarded due to lingering concerns about high prices and softening labor markets.
• Yield Check:
  • 2-yr: +2 bps to 3.51%
  • 3-yr: +2 bps to 3.57%
  • 5-yr: +1 bp to 3.75%
  • 10-yr: -1 bp to 4.84%
  • 30-yr: -2 bps to 4.84%

Data Recon

• The employment situation in December was better than feared and not entirely bad, unless one is counted among the long-term unemployed. Nonfarm payrolls increased by 50,000; the unemployment rate fell to 4.4% from 4.5%; and average hourly earnings increased 3.8% year-over-year versus 3.6% in November.
  • Granted, the employment situation could be better, but the key takeaway is that the low unemployment rate will temper concerns that consumer spending and the economy will slow rapidly due to a weak labor market. It will also likely keep the Fed's next rate cut at bay.
• Housing starts in October declined 4.6% month-over-month to a seasonally adjusted annual rate of 1.246 million (Briefing.com consensus: 1.340 million). Building permits decreased 0.2% to a seaonally adjusted annual rate of 1.412 million (Briefing.com consensus: 1.355 million).
  • The key takeaway from the report is that the weakness in starts was driven entirely by multi-family units. Single-unit starts were up 5.4% month-over-month and at their highest level since July.
• Yield Check:
  • 2-yr: +2 bps to 3.51%
  • 3-yr: +2 bps to 3.57%
  • 5-yr: +1 bp to 3.75%
  • 10-yr: UNCH at 4.18%
  • 30-yr: -1 bp to 4.85%