Bond Market Update

Long End Paces Fifth Consecutive Retreat

• U.S. Treasuries had an imperfect week, with all tenors recording five consecutive losses ahead of next week's expected rate cut and despite a decent pair of note offerings. The Friday retreat started with a lower open and continued weakness into the afternoon that lifted yields on the 5-yr note and longer tenors to their highest levels in three weeks. The only semblance of strength was seen in Treasury bills, as their yields slipped to fresh lows for the year. Economic data did not play much of a factor on Friday, since the market only received Import/Export prices for November. The report only showed mild increases for November, though October readings were revised higher. The daylong pressure on Treasuries weighed on equities, causing them to give up their starting gains, but the S&P 500 found some support near its unchanged level. Overseas, there was disappointment surrounding a lack of a specific stimulus announcement in China while the U.K. reported weak growth figures for October, though the Bank of England is still expected to hold its bank rate steady when it meets next week. This week's underperformance in longer tenors, which could be reflective of concerns about hotter future inflation stemming from policy loosening, expanded the 2s10s spread by eleven basis points to 16 bps. Crude oil recaptured its 50-day moving average (70.32), gaining $4.12, or 6.1%, for the week, while the U.S. Dollar Index rose 0.1% to 107.02, advancing 1.0% for the week.
• Yield Check:
  • 2-yr: +5 bps to 4.24% (+14 bps this week)
  • 3-yr: +6 bps to 4.22% (+16 bps this week)
  • 5-yr: +7 bps to 4.25% (+22 bps this week)
  • 10-yr: +8 bps to 4.40% (+25 bps this week)
  • 30-yr: +7 bps to 4.62% (+29 bps this week)

• News:
  • Germany's Chancellor Scholz is set to face a confidence vote on Monday that he is expected to lose.
  • French President Macron named Francois Bayrou as the next prime minister.
  • European Central Bank policymakers spoke in favor of additional rate cuts.
  • Bundesbank lowered Germany's growth forecast for 2025 to 0.2% from 1.1% while the outlook for 2026 was trimmed to 0.8% from 1.4%. The CPI forecast for 2025 was lowered to 2.4% from 2.7% while the outlook for 2026 was reduced to 2.1% from 2.2%.
  • South Korea's opposition party is attempting to impeach President Yoon for the second time.
  • China's November New Loans reached CNY580.0 bln (expected CNY950.0 bln; last CNY500.0 bln). November Outstanding Loans grew 7.7% yr/yr (expected 7.9%; last 8.0%) and total social financing reached CNY2.34 trln (expected CNY2.80 trln; last CNY1.40 trln).
  • Japan's Q4 Tankan All Big Industry Capex was up 11.3% (expected 9.6%; last 10.6%). Q4 Tankan Large Manufacturers Index rose to 14 from 13 (expected 13) and Small Manufacturers Index remained at 0 (expected -2). Q4 Tankan Large Non-Manufacturers Index fell to 33 from 34, as expected, and Small Non-Manufacturers Index rose to 16 from 14 (expected 11). October Industrial Production was up 2.8% m/m (expected 3.0%; last 1.6%) and Capacity Utilization was up 2.6% m/m (last 4.4%).
  • South Korea's November Import Price Index was up 3.0% yr/yr (last -2.5%) and Export Price Index was up 7.0% yr/yr (last 2.0%).
  • New Zealand's November Business PMI hit 45.5 (last 45.8). October External Migration & Visitors increased 6.3% yr/yr (last 0.9%).
  • Eurozone's October Industrial Production was unchanged m/m, as expected (last -1.5%), falling 1.2% yr/yr (expected -1.9%; last -2.2%).
  • Germany's October trade surplus reached EUR13.4 bln (expected surplus of EUR15.7 bln; last surplus of EUR17.0 bln). October imports were down 0.1% m/m (expected -0.6%; last 2.1%) and exports were down 2.8% m/m (expected -2.0%; last -1.7%). November WPI was unchanged m/m (expected 0.2%; last 0.4%), falling 0.6% yr/yr (last -0.8%).
  • U.K.'s October GDP was down 0.1% m/m (expected 0.1%; last -0.1%) but up 1.3% yr/yr (expected 1.6%; last 1.0%).
  • France's November CPI was down 0.1% m/m (expected 0.1%; last 0.3%) but up 1.3% yr/yr, as expected (last 1.2%).
  • Spain's November CPI was up 0.2% m/m, as expected (last 0.6%), rising 2.4% yr/yr, as expected (last 1.8%). November Core CPI was up 2.4% yr/yr, as expected (last 2.5%).
• Today's Data:
  • Import prices were up 0.1% in November after increasing a revised 0.1% (from 0.3%) in October. Excluding oil, import prices were unchanged after increasing 0.2% in October. Export prices were unchanged in November after increasing a revised 1.0% (from 0.8%) in October. Excluding agriculture, export prices were up 0.1% after increasing a revised 0.8% (from 0.6%) in October.
• Commodities:
  • WTI crude: +1.7% to $71.29/bbl
  • Gold: -1.2% to $2676.70/ozt
  • Copper: -0.9% to $4.20/lb
• Currencies:
  • EUR/USD: +0.3% to 1.0495
  • GBP/USD: -0.5% to 1.2616
  • USD/CNH: +0.1% to 7.2813
  • USD/JPY: +0.7% to 153.72
• The Week Ahead:
  • Monday: December Empire State Manufacturing Survey (prior 31.2) at 8:30 ET; flash December S&P Global U.S. Manufacturing PMI (prior 49.7) and flash December S&P Global U.S. Services PMI (prior 56.1) at 9:45 ET
  • Tuesday: November Retail Sales (prior 0.4%) and Retail Sales ex-auto (prior 0.1%) at 8:30 ET; November Industrial Production (prior -0.3%) and Capacity Utilization (prior 77.1%) at 9:15 ET; October Business Inventories (prior 0.1%) and December NAHB Housing Market Index (prior 46) at 10:00 ET; and $13 bln 20-yr Treasury bond reopening results at 13:00 ET
  • Wednesday: Weekly MBA Mortgage Index (prior 5.4%) at 7:00 ET; November Housing Starts (prior 1.311 mln), Building Permits (prior 1.416 mln), and Q3 Current Account Balance (prior -$266.8 bln) at 8:30 ET; weekly crude oil inventories (prior -1.43 mln) at 10:30 ET; and December FOMC Decision (prior 4.50-4.75%) at 14:00 ET
  • Thursday: Q3 GDP -- third estimate (prior 2.8%), Q3 GDP Deflator -- third estimate (prior 1.9%), weekly Initial Claims (prior 242,000), and Continuing Claims (prior 1.886 mln) at 8:30 ET; November Existing Home Sales (prior 3.96 mln) and November Leading Indicators (prior -0.4%) at 10:00 ET; weekly natural gas inventories (prior -190 bcf) at 10:30 ET; and October Net Long-Term TIC Flows (prior $216.1 bln) at 16:00 ET
  • Friday: November Personal Income (prior 0.6%), Personal Spending (prior 0.4%), PCE Prices (prior 0.2%), and Core PCE Prices (prior 0.3%) at 8:30 ET; and final December University of Michigan Consumer Sentiment (prior 74.0) at 10:00 ET