Bond Market Update

Post-FOMC Losses Trimmed

• U.S. Treasuries ended a volatile week on a higher note, allowing yields on 10s and 30s to dip from their highest levels since May. The trading day started with gains that were paced by the short end after a night that saw the release of a big batch of economic data from Asia and Europe and news of a rejected short-term funding deal in the U.S. that boosted the likelihood of a government shutdown starting this weekend. Treasuries added to their starting gains after today's economic data showed cooler than expected growth in November Personal Income (0.3%; Briefing.com consensus 0.4%) and Personal Spending (0.4%; Briefing.com consensus 0.5%) as well as the core PCE Price Index (0.1%; Briefing.com consensus 0.2%). However, the core PCE Price Index growth remained at 2.8% on a year-over-year basis for the second month in a row. The market inched to fresh highs in midday trade, followed by an afternoon dip that returned the 5-yr note to its opening level while the 2-yr note finished on its low despite leading the market higher out of the gate. Longer tenors had a better intraday showing, finishing above their starting levels after lagging earlier in the week. This week's outperformance up front expanded the 2s10s spread by seven basis points to 21 bps. Crude oil narrowed this week's loss to $1.86, or 2.6%, while the U.S. Dollar Index fell 0.7% to 107.62 today, trimming this week's gain to 0.6%.
• Yield Check:
  • 2-yr: -1 bp to 4.31% (+7 bps this week)
  • 3-yr: -2 bps to 4.32% (+10 bps this week)
  • 5-yr: -5 bps to 4.38% (+13 bps this week)
  • 10-yr: -5 bps to 4.52% (+12 bps this week)
  • 30-yr: -2 bps to 4.72% (+10 bps this week)

• News:
  • The Atlanta Fed's GDPNow forecast for Q4 GDP was lowered to 3.1% from 3.2% in the previous estimate.
  • President-elect Trump will request that NATO countries increase their defense spending target to 5% of GDP.
  • France's Prime Minister Bayrou said that a new cabinet will be announced before Christmas Day and a budget should be ready by the middle of February. Meanwhile, European Central Bank policymaker Villeroy de Galhau said that the new French government must reduce the deficit next year.
  • Germany's President Steinmeier is expected to dissolve parliament next Friday after Chancellor Olaf Scholz lost a confidence vote.
  • Bank of Japan Governor Ueda said that he wants to see "one more notch" in the rate hike cycle, adding that there might not be enough supportive data to make that decision at the January meeting.
  • The People's Bank of China left its one-year and five-year loan prime rates at 3.10% and 3.60%, respectively.
  • Japan's November National CPI was up 0.6% m/m (last 0.4%), rising 2.9% yr/yr (last 2.3%). November National Core CPI was up 2.7% yr/yr (expected 2.6%; last 2.3%).
  • South Korea's November PPI was up 0.1% m/m (last -0.1%), rising 1.4% yr/yr (last 1.0%).
  • Hong Kong's November CPI was unchanged m/m (last 0.2%), rising 1.4% yr/yr (expected 1.5%; last 1.4%).
  • Australia's November Private Sector Credit was up 0.5% m/m, as expected (last 0.6%) and November Housing Credit was also up 0.5% m/m (last 0.5%).
  • New Zealand's November trade deficit reached NZD437 mln (expected deficit of NZD1.95 bln; last deficit of NZD1.66 bln). November Credit Card Spending was down 3.2% yr/yr (last 0.3%).
  • Germany's November PPI was up 0.5% m/m (expected 0.3%; last 0.2%), rising 0.1% yr/yr (expected -0.3%; last -1.1%).
  • U.K.'s November Retail Sales rose 0.2% m/m (expected 0.5%; last -0.7%), increasing 0.5% yr/yr (expected 0.8%; last 2.0%). November Core Retail Sales were up 0.3% m/m (expected 0.0%; last -0.9%), rising 0.1% yr/yr (expected 0.7%; last 1.6%). November Public Sector Net Borrowing reached GBP11.25 bln (expected GBP15.50 bln; last GBP18.22 bln). December CBI Distributive Trades Survey rose to -15 from -18 (expected -9).
  • France's November PPI was up 3.2% m/m (last 0.9%) but down 5.2% yr/yr (last -6.0%).
  • Italy's December Business Confidence fell to 85.8 from 86.5 (expected 86.0) and Consumer Confidence dipped to 96.3 from 96.6 (expected 97.0). October Industrial Sales were up 0.5% m/m (last -0.3%) but down 5.3% yr/yr (last -5.7%). November PPI was up 1.2% m/m (last 0.7%) but down 0.5% yr/yr (last -2.8%).
• Today's Data:
  • Personal income increased 0.3% month-over-month in November (Briefing.com consensus 0.4%) following an upwardly revised 0.7% (from 0.6%) in October. Personal spending rose 0.4% month-over-month (Briefing.com consensus 0.5%) following a downwardly revised 0.3% increase (from 0.4%) in October. The PCE Price Index was up 0.1% month-over-month (Briefing.com consensus 0.2%); however, it ticked up to 2.4% year-over-year from 2.3% in October. The core-PCE Price Index, which excludes food and energy, also increased 0.1% month-over-month and held steady at 2.8% year-over-year.
    • The key takeaway from the report is that there wasn't any improvement in the year-over-year readings for PCE and core-PCE inflation.
  • The final University of Michigan Index of Consumer Sentiment for December held steady at 74.0 (Briefing.com consensus 74.2) from the preliminary reading. In the same period a year ago, the index stood at 69.7.
    • The key takeaway from the report is the understanding that consumers are expecting future price increases for large purchases, which is driving a pickup in current buying conditions.
• Commodities:
  • WTI crude: +0.1% to $69.43/bbl
  • Gold: +1.4% to $2644.40/ozt
  • Copper: +0.7% to $4.11/lb
• Currencies:
  • EUR/USD: +0.8% to 1.0439
  • GBP/USD: +0.7% to 1.2595
  • USD/CNH: -0.2% to 7.2939
  • USD/JPY: -0.8% to 156.09
• The Week Ahead:
  • Monday: $69 bln 2-yr Treasury note auction results at 13:00 ET
  • Tuesday: November Durable Orders (prior 0.2%) and Durable Orders ex-transportation (prior 0.1%) at 8:30 ET; November New Home Sales (prior 610,000) at 10:00 ET; and $70 bln 5-yr Treasury note auction results at 11:30 ET; NYSE to close at 13:00 ET; Treasury market to close at 14:00 ET
  • Wednesday: Bond and equity markets closed for Christmas Day
  • Thursday: Weekly Initial Claims (prior 220,000) and Continuing Claims (prior 1.874 mln) at 8:30 ET; weekly crude oil inventories (prior -934,000) at 11:00 ET; and $44 bln 7-yr Treasury note auction results at 13:00 ET
  • Friday: November advance goods trade balance (prior -$99.1 bln), November advance Retail Inventories (prior 0.1%), and November advance Wholesale Inventories (prior 0.2%) at 8:30 ET; and weekly natural gas inventories (prior -125 bcf) at 10:30 ET