Bond Market Update

Equity Weakness Supports Intraday Reversal

• U.S. Treasuries ended the week on a slightly lower note after staging a bounce off fresh November lows in the 10-yr note and shorter tenors. Treasuries opened the day with losses that resulted from comments made by Fed Chairman Powell shortly after yesterday's cash close. Mr. Powell lauded the strength of the U.S. economy, saying it is not giving the FOMC a reason to rush with rate cuts. The remarks exerted some pressure on rate cut expectations for December, though at 58.2%, the implied likelihood of a 25-bps decrease in five weeks is only down six percentage points from a week ago. Treasuries added to their opening losses in early action, responding to a solid batch of economic reports, including above-consensus Retail Sales for October (0.4%; Briefing.com consensus 0.3%) and an upward revision to the reading from September (to 0.8% from 0.4%), a strong Empire State Manufacturing Survey (31.2; Briefing.com consensus 3.3; prior -11.9), and a sizable increase in October Export Prices (0.8%). The post-data selling lifted yields on 10s and shorter tenors to fresh highs for the month while the 30-yr yield stopped one basis point shy of its post-election high. Treasuries inched up off their lows in mid-morning action, accelerating their recovery as equities faced steady pressure into the afternoon. The rally reversed the bulk of today's increase in yields on most tenors, but they still finished the week well above last Friday's levels with the 2s10s spread expanding by seven basis points to 13 basis points. Crude oil fell toward its September low (65.27), losing $3.36, or 4.8% for the week, while the U.S. Dollar Index was little changed at 106.67, locking in a 1.6% gain for the week.
• Yield Check:
  • 2-yr: +1 bp to 4.30% (+5 bps this week)
  • 3-yr: +1 bp to 4.27% (+7 bps this week)
  • 5-yr: +1 bp to 4.30% (+11 bps this week)
  • 10-yr: +1 bp to 4.43% (+12 bps this week)
  • 30-yr: +2 bps to 4.60% (+12 bps this week)

• News:
  • The Atlanta Fed's GDPNow forecast for Q4 GDP was left unrevised at 2.5%.
  • President-elect Trump is appointing Jay Clayton, who favors increased deregulation, as the U.S. Attorney for Southern District of New York.
  • Japan's Finance Minister Kato said that one-sided sharp moves are being seen in the foreign exchange market and they are being watched with a high sense of urgency.
  • Samsung agreed to a 5.1% pay increase with its labor union in South Korea.
  • Germany's Chancellor Scholz is scheduled to meet with China's President Xi on Tuesday.
  • China's October Industrial Production was up 5.3% yr/yr (expected 5.5%; last 5.4%), Retail Sales grew 4.8% yr/yr (expected 3.8%; last 3.2%), Fixed Asset Investment increased 3.4% yr/yr (expected 3.5%; last 3.4%), and Unemployment Rate fell to 5.0% from 5.1% (expected 5.1%). October FDI was down 29.8% YTD (last -30.4%).
  • Japan's flash Q3 GDP was up 0.2%, as expected (last 0.5%), rising 0.9% yr/yr (expected 0.7%; last 2.2%). Q3 GDP Price Index was up 2.5% yr/yr (expected 2.8%; last 3.1%), Q3 GDP Private Consumption was up 0.9% qtr/qtr (expected 0.2%; last 0.7%), Q3 GDP External Demand was down 0.4% qtr/qtr (expected 0.1%; last -0.1%), and Q3 GDP Capital Expenditure was down 0.2% qtr/qtr, as expected (last 0.9%). September Industrial Production was up 1.6% m/m (expected 1.4%; last 1.4%). September Tertiary Industry Activity Index rose to 1.9 from -2.9 (expected 0.2).
  • South Korea's October trade surplus reached $3.15 bln (last surplus of $3.17 bln) as imports rose 1.7% yr/yr (last 1.7%) and exports grew 4.6% yr/yr (last 4.6%).
  • Hong Kong's Q3 GDP was down 1.1% qtr/qtr, as expected (last 0.4%) but up 1.8% yr/yr, as expected (last 3.3%).
  • New Zealand's October Business PMI hit 45.8 (last 46.9).
  • Germany's October WPI was up 0.4% m/m (expected 0.1%; last -0.3%) but down 0.8% yr/yr (last -1.6%).
  • U.K.'s Q3 GDP expanded 0.1% qtr/qtr (expected 0.2%; last 0.5%), growing 1.0% yr/yr (expected 0.1%; last 0.7%).
  • France's October CPI was up 0.3% m/m (expected 0.2%; last -1.3%), rising 1.2% yr/yr, as expected (last 1.1%).
  • Italy's October CPI was unchanged m/m, as expected (last -0.2%), rising 0.9% yr/yr, as expected (last 0.7%). September trade surplus reached EUR2.58 bln (expected EUR2.55 bln; last EUR1.34 bln).
  • Swiss October PPI was down 0.3% m/m (expected 0.1%; last -0.1%), falling 1.8% yr/yr (last -1.3%).
• Today's Data:
  • The New York Fed Empire State Manufacturing Survey for November checked in at 31.2 (Briefing.com consensus 3.3) following a -11.9 reading for October. A number above 0.0 is indicative of expansion. The New Orders Index surged to 28.0 from -10.2.
    • The key takeaway from the report is that the November reading is the highest reading in nearly three years; moreover, firms remained optimistic that conditions would continue to improve in the months ahead.
  • Total retail sales increased 0.4% month-over-month in October (Briefing.com consensus 0.3%) following an upwardly revised 0.8% increase (from 0.4%) in September. Excluding autos, retail sales increased 0.1% month-over-month (Briefing.com consensus 0.2%) following an upwardly revised 1.0% increase (from 0.5%) in September.
    • The key takeaway from the report is that the upward revisions for September make the October results better than they appear since the growth is coming on top of a higher base. With month-over-month increases for nonstore retailers (+0.3%), food services and drinking places (+0.7%), electronics and appliance stores (+2.3%), and building materials and garden equipment and supplies dealers (+0.5%), it is clear that the consumer continues to embrace discretionary spending activity.
  • Import prices increased 0.3% month-over-month in October and were up 0.8% year-over-year. Excluding fuel, import prices were up 0.2% month-over-month and up 2.3% year-over-year. Export prices increased 0.8% month-over-month and were down 0.1% year-over-year. Excluding agricultural products, export prices jumped 0.6% month-over-month and were flat year-over-year. Import prices were up 0.3% in October after decreasing 0.4% in September. Excluding oil, import prices were up 0.2% after increasing 0.2% in September.
    • The key takeaway from the report is that prices picked up on a monthly basis following declines in August and September.
  • Total industrial production decreased 0.3% month-over-month in October (Briefing.com consensus -0.3%) following a downwardly revised 0.5% decline (from -0.3%) in September. The capacity utilization rate fell to 77.1% (Briefing.com consensus 77.3%) from a downwardly revised 77.4% (from 77.5%) in September. Total industrial production declined 0.3% yr/yr while the capacity utilization rate was 2.6 percentage points below its long-run average.
    • The key takeaway from the report is that industrial production in October was pressured by two extraordinary factors, but even excluding those factors, it was still relatively weak in October. The Boeing strike held down total industrial production growth by an estimated 0.2 percentage point in October while Hurricane Milton and the lingering effects of Hurricane Helen reduced industrial production growth by 0.1 percentage point.
  • Business Inventories were up 0.1% in September (Briefing.com consensus 0.2%) after increasing 0.3% in August.
• Commodities:
  • WTI crude: -2.4% to $67.02/bbl
  • Gold: -0.1% to $2570.00/ozt
  • Copper: -0.5% to $4.07/lb
• Currencies:
  • EUR/USD: UNCH at 1.0531
  • GBP/USD: -0.5% to 1.2607
  • USD/CNH: -0.2% to 7.2362
  • USD/JPY: -1.3% to 154.22
• The Week Ahead:
  • Monday: November NAHB Housing Market Index (prior 43) at 10:00 ET and September Net Long-Term TIC Flows (prior $111.4 bln) at 16:00 ET
  • Tuesday: October Housing Starts (prior 1.354 mln) and Building Permits (prior 1.428 mln) at 8:30 ET
  • Wednesday: Weekly MBA Mortgage Index (prior 0.5%) at 7:00 ET; weekly crude oil inventories (prior +2.09 mln) at 10:30 ET; and $16 bln 20-yr Treasury bond auction results at 13:00 ET
  • Thursday: Weekly Initial Claims (prior 217,000), Continuing Claims (prior 1.873 mln), and November Philadelphia Fed survey (prior 10.3) at 8:30 ET; October Existing Home Sales (prior 3.84 mln) and October Leading Indicators (prior -0.5%) at 10:00 ET; and weekly natural gas inventories (prior +42 bcf at 10:30 ET
  • Friday: Flash November S&P Global U.S. Manufacturing PMI (prior 48.5) and flash November S&P Global U.S. Services PMI (prior 55.0) at 9:45 ET; and final November University of Michigan Consumer Sentiment (prior 73.0) at 10:00 ET