Bond Market Update

Tariff Threat Weighs

• Longer-dated Treasuries retreated on Tuesday while the short end outperformed, allowing the 2-yr note to record a slim gain. The trading day started with losses across the curve after President-elect Trump threatened to start his presidency with an immediate 25% tariff on imports from Canada and Mexico and an additional 10% tariff on imports from China, fueling concerns about the resulting impact on prices. Treasuries added to their losses in morning trade even though economic data released today included a disappointing report on New Home Sales in October (610,000; Briefing.com consensus 718,000) and Consumer Confidence in November (111.7; Briefing.com consensus 113.0). Treasuries reached their lowest level in late morning trade, with most tenors spending the remainder of the session above their lows and below their starting levels. The U.S. Treasury followed yesterday's strong sale of 2-yr notes with a $70 bln 5-yr note offering that was also solid. Later in the day, the FOMC released its latest policy Minutes, showing an agreement that a rate cut would be warranted if the economy continues evolving as expected. Crude oil faced some more pressure after yesterday's dive while the U.S. Dollar Index rose 0.2% to 106.99.
• Yield Check:
  • 2-yr: -2 bps to 4.25%
  • 3-yr: +1 bp to 4.22%
  • 5-yr: +2 bps to 4.19%
  • 10-yr: +4 bps to 4.30%
  • 30-yr: +3 bps to 4.48%

• News:
  • Israel reached a cease fire agreement with Hezbollah.
  • Minneapolis Fed President (non-voter) Kashkari said that it is reasonable to consider a rate cut in December.
  • The Reserve Bank of Australia expects weaker domestic growth and lower interest rates under the incoming Trump administration in the U.S.
  • China's Commerce Ministry pledged to strengthen communication and expand cooperation with the U.S.
  • European Central Bank policymaker Makhlouf said that he is open minded regarding the pace of rate cuts while policymaker Nagel cautioned against cutting too quickly.
  • The European Commission is expected to approve France's plan for spending and reforms, but there is still a likelihood of a snap election being forced next year.
  • Japan's November Corporate Services Price Index was up 2.9% yr/yr (expected 2.5%; last 2.8%).
  • South Korea's November Consumer Confidence hit 100.7 (last 101.7).
  • Hong Kong's October trade deficit reached $31.0 bln (last deficit of $53.2 bln) as imports rose 4.5% m/m (last 1.4%) and exports grew 3.5% m/m (last 4.7%).
  • Singapore's October Industrial Production was up 0.1% m/m (expected -0.8%; last -1.5%), rising 1.2% yr/yr (expected 1.5%; last 9.0%).
  • U.K.'s November CBI Distributive Trades Survey fell to -18 from -6 (expected -14).
• Today's Data:
  • New home sales declined 17.3% month-over-month in October to a seasonally adjusted annual rate of 610,000 units (Briefing.com consensus 718,000) from an unrevised 738,000 in September. On a year-over-year basis, new home sales were down 9.4%.
    • The key takeaway from the report is that new home sales, which are tabulated when contracts are signed, dropped sharply in October as mortgage rates rose sharply in the wake of the Fed's first rate cut in September. The effects of the hurricanes were also likely to blame for the extra weakness seen in the South, which is the nation's biggest region for new home sales.
  • The Conference Board's Consumer Confidence Index jumped to 111.7 in November (Briefing.com consensus 113.0) from an upwardly revised 109.6 (from 108.7) in October. The cutoff date for responses was November 18, so after the election.
    • The key takeaway from the report is that consumers' view of the present situation picked up nicely, particularly as it relates to the labor market. That is noteworthy because, if consumers feel good about job security and/or their ability to find a new job, they are apt to keep spending freely on discretionary goods/services.
  • The S&P Case Shiller Home Price Index was up 4.6% year-over-year in September (Briefing.com consensus 4.7%) after being up 5.2% in August.
  • The FHFA Housing Price Index was up 0.7% in September after increasing a revised 0.4% (from 0.3%) in August.
  • $70 bln 5-year Treasury note auction results (prior 12-auction average):
    • High yield: 4.197% (4.150%).
    • Bid-to-cover: 2.43 (2.39).
    • Indirect bid: 64.1% (67.9%). 
    • Direct bid: 24.6% (16.9%).
• Commodities:
  • WTI crude: -0.1% to $68.88/bbl
  • Gold: +0.1% to $2621.40/ozt
  • Copper: -0.9% to $4.12/lb
• Currencies:
  • EUR/USD: -0.2% to 1.0475
  • GBP/USD: -0.1% to 1.2549
  • USD/CNH: +0.2% to 7.2604 
  • USD/JPY: -0.7% to 153.10
• The Day Ahead:
  • 7:00 ET: Weekly MBA Mortgage Index (prior 1.7%)
  • 8:30 ET: October Personal Income (Briefing.com consensus 0.3%; prior 0.3%), Personal Spending (Briefing.com consensus 0.2%; prior 0.5%), PCE Prices (Briefing.com consensus 0.2%; prior 0.2%), Core PCE Prices (Briefing.com consensus 0.3%; prior 0.3%), Q3 GDP -- second estimate (Briefing.com consensus 2.8%; prior 2.8%), Q3 GDP Deflator -- second estimate (Briefing.com consensus 1.8%; prior 1.8%), October Durable Orders (Briefing.com consensus 0.4%; prior -0.8%), Durable Orders ex-transportation (Briefing.com consensus 0.3%; prior 0.4%), October advance goods trade balance (prior -$108.2 bln), advance Retail Inventories (prior 0.8%), Advance Wholesale Inventories (prior -0.1%), weekly Initial Claims (Briefing.com consensus 217,000; prior 213,000), and Continuing Claims (prior 1.908 mln)
  • 10:00 ET: October Pending Home Sales (Briefing.com consensus -1.5%; prior 7.4%)
  • 10:30 ET: Weekly crude oil inventories (prior +0.545 mln)
  • 12:00 ET: Weekly natural gas inventories (prior -3 bcf)
• Treasury Auctions:
  • 13:00 ET: $44 bln 7-yr Treasury note auction results