Bond Market Update

Buyers Drawn to Data

• U.S. Treasuries were weaker in the overnight trade and into the morning session in front of the 8:30 a.m. ET release of the November Retail Sales Report. The 2-yr note yield stood at 4.28% and the 10-yr note yield stood at 4.44%. They would settle at 4.24% and 4.38%, respectively, reclaiming their losses after the retail sales report showed an otherwise soft 0.2% increase in sales, excluding autos. That line item was viewed as a sign of softening in consumer spending activity since the report is not adjusted for price changes, meaning there wasn't any real pickup in volume/demand driving the 0.2% increase. A weaker-than-expected industrial production report followed and helped solidify a reversal in the market. Treasuries would eventually settle into a tightly-traded range for the bulk of today's cash session, ignoring a relatively weak $13 billion 20-yr bond reopening and waiting on Wednesday's FOMC decision and Summary of Economic Projections. The fed funds futures market shows a 95.4% probability of a 25-basis points cut to 4.25-4.50% on Wednesday and only a 16.3% probability of another 25-basis points cut at the January FOMC meeting according to the CME FedWatch Tool.
• Yield Check:
  • 2-yr: unch at 4.24%
  • 3-yr: unch at 4.22%
  • 5-yr: unch at 4.25%
  • 10-yr: -2 bps to 4.38%
  • 30-yr: -3 bps to 4.58%

• News:
  • Congressional lawmakers reach bipartisan deal to fund government through March 14 and provide $100 bln for disaster relief, according to Politico (votes expected later this week)
  • China is going to target a 2025 budget deficit that is a record 4.0% of GDP to help preserve its growth target of 'around 5.0%,' according to Reuters
  • China strikes back at U.S. tech restrictions with antitrust reviews of major acquisitions, according to The Information
  • $13 billion 20-yr bond reopening met with relative weak demand; high yield of 4.686% tailed the when-issued yield by 1.5 basis points
  • Bank of England rate cut expectations getting dialed back after a report showing stronger than expected employment and earnings data for November
  • German Chancellor Scholz lost the confidence vote, as expected, setting stage for a snap election in February
  • Ceasefire deal between Israel and Gaza could be signed in a few days, according to Reuters
  • Soaring demand for gold drove a record trade deficit for India, according to Bloomberg
  • Germany's Ifo Business Climate Index hit its lowest level (84.7) since October 2022
  • The Bank of France cut its 2025 GDP growth forecast from 1.2% to 0.9% while the Swiss cut their 2025 growth forecast from 1.6% to 1.5%
• Today's data:
  • Total retail sales increased 0.7% month-over-month in November (Briefing.com consensus 0.5%) following an upwardly revised 0.5% (from 0.4%) in October. Excluding autos, retail sales were up a more modest 0.2% month-over-month (Briefing.com consensus 0.4%) following an upwardly revised 0.2% (from 0.1%) in October.
    • The key takeaway from the report is in the ex-auto number, which was up modestly and a reflection of some softening spending activity given that it is not adjusted for price changes. In other words, the overall sales increase, excluding autos, appears to be more price driven than volume driven.
  • Total industrial production decreased 0.1% month-over-month in November (Briefing.com consensus 0.3%) following a downwardly revised 0.4% decline (from -0.3%) in October. The capacity utilization rate fell to 76.8% (Briefing.com consensus 77.3%) from a downwardly revised 77.0% (from 77.1%) in October. Total industrial production declined 0.9% yr/yr while the capacity utilization rate was 2.9 percentage points below its long-run average.
    • The key takeaway from the report is that industrial production didn't show any strong rebound from the prior two months that were adversely impacted by the hurricanes. There was some modest strength in manufacturing output, but total industrial production is still lagging.
  • October business inventories increased 0.1% month-over-month (Briefing.com consensus 0.2%) following a downwardly revised 0.0% (from 0.1%) for September.
  • The December NAHB Housing Market Index checked in at 46 (Briefing.com consensus 47) following an unrevised 46 for November.
• Commodities:
  • WTI crude: -1.7% to $69.62/bbl
  • Gold: -0.3% to $2662.30/ozt
  • Copper: -0.9% to $4.15/lb
• Currencies:
  • EUR/USD: -0.2% to 1.0489
  • GBP/USD: +0.2% to 1.2707
  • USD/CNH: -0.1% to 7.2873
  • USD/JPY: -0.5% to 153.34
• The Day Ahead:
  • 07:00 ET: MBA Mortgage Applications Index (prior 5.4%)
  • 08:30 ET: November Housing Starts (Briefing.com consensus 1347K; prior 1311K) and Building Permits (Briefing.com consensus 1430K; prior 1416K)
  • 08:30 ET: Q3 Current Account Balance (Briefing.com consensus -$283.0B; prior -$266.8B)
  • 10:30 ET: EIA Crude Oil Inventories (prior -1.43M)
  • 14:00 ET: FOMC Rate Decision and Summary of Economic Projections
  • 14:30 ET: Fed Chair Powell press conference