Bond Market Update

Rate Cut Odds Slide as Hiring Remains Strong

• U.S. Treasuries ended the week on a lower note after a strong jobs report for December (256,000; Briefing.com consensus 154,000; prior 212,000) reduced the market's rate cut hopes. The trading day started with slight losses in shorter tenors after a night that was fairly light in terms of market-moving news. Treasuries quickly slumped from their opening levels after the December jobs report crossed the wires, showing an unexpected acceleration in hiring and a dip in the Unemployment Rate to 4.1% from 4.2%. The post-data selling was paced by the short end, sending the 2-yr yield past its 200-day moving average (4.344%) to a level not seen since late July while yields on longer tenors jumped to levels last seen in November 2023. Rate cut expectations took a hit, with the implied likelihood of a May cut falling to just 38.0% from yesterday's 55.3%, according to the CME FedWatch tool. The market now expects the next cut to take place in June (56.3%), but that could change quickly if more strong economic reports are released in the coming weeks. Bank of America released a note, saying that it does not expect additional easing from the FOMC, echoing yesterday's remarks from Fed Governor Bowman (FOMC voter), who said that she believes the December rate cut was the last in the recalibration phase. Even with today's underperformance, the 2-yr note finished the week a bit ahead of other tenors, which expanded the 2s10s spread by six basis points to 38 bps. Crude oil rallied past its 200-day moving average (75.50) to its best level since early October while the U.S. Dollar Index climbed 0.4% to 109.65, gaining 0.7% for the week.
• Yield Check:
  • 2-yr: +13 bps to 4.40% (+12 bps this week)
  • 3-yr: +14 bps to 4.48% (+16 bps this week)
  • 5-yr: +13 bps to 4.59% (+18 bps this week)
  • 10-yr: +9 bps to 4.78% (+18 bps this week)
  • 30-yr: +4 bps to 4.97% (+16 bps this week)

• News:
  • The People's Bank of China said that it will suspend bond purchases this month due to a short supply and excess demand ahead of Tuesday's joint briefing with China's foreign exchange regulator regarding financial support for the economy.
  • Bank of England Deputy Governor Breeden tried to assuage concerns about recent volatility in the pound and Gilts, saying that the quantitative tightening program could be adjusted.
  • British supermarket operator Sainsbury was the latest retailer to report disappointing results for the holiday period.
  • ANZ pulled forward its forecast for a rate cut from the Reserve Bank of Australia to February.
  • Japan's November Household Spending was up 0.4% m/m (expected -0.9%; last 2.9%) but down 0.4% yr/yr (expected -0.6%; last -1.3%). November Leading Index fell to 107.0 from 109.1 (expected 107.2) and Coincident Indicator was down 1.5% m/m (last 2.8%).
  • India's November Industrial Production was up 5.2% yr/yr (expected 4.0%; last 3.7%) and November Manufacturing Output rose 5.8% m/m (last 4.4%).
  • France's November Consumer Spending rose 0.3% m/m (expected 0.1%; last -0.3%) and November Industrial Production ticked up 0.2% m/m (expected -0.1%; last -0.3%).
  • Italy's November Retail Sales were down 0.4% m/m (expected 0.2%; last -0.5%) but up 1.1% yr/yr (last 2.6%).
  • Spain's November Industrial Production was down 0.4% yr/yr (last 1.5%).
  • Swiss December Unemployment Rate remained at 2.6% (expected 2.7%).
• Today's Data:
  • December nonfarm payrolls increased by 256,000 (Briefing.com consensus 154,000). The 3-month average for total nonfarm payrolls held steady at 170,000. November nonfarm payrolls revised to 212,000 from 227,000. October nonfarm payrolls revised to 43,000 from 36,000.
    • December private sector payrolls increased by 223,000 (Briefing.com consensus 140,000). November private sector payrolls revised to 182,000 from 194,000. October private sector payrolls revised to 9,000 from -2,000. December unemployment rate was 4.1% (Briefing.com consensus 4.2%), versus 4.2% in November.
    • December unemployment rate was 4.1% (Briefing.com consensus 4.2%), versus 4.2% in November. Persons unemployed for 27 weeks or more accounted for 22.4% of the unemployed versus 23.1% in November. The U6 unemployment rate, which accounts for unemployed and underemployed workers, decreased to 7.5% from 7.7%.
    • December average hourly earnings were up 0.3% (Briefing.com consensus 0.3%) versus 0.4% in November. Over the last 12 months, average hourly earnings have risen 3.9%, versus 4.0% for the 12 months ending in November.
    • The average workweek in December was 34.3 hours (Briefing.com consensus 34.3), versus 34.3 hours in November. Manufacturing workweek was little changed at 40.0 hours. Factory overtime dipped 0.1 hour to 2.8 hours.
    • The labor force participation rate held steady at 62.5% and the employment-population ratio increased to 60.0% from 59.8%.
  • The preliminary University of Michigan Index of Consumer Sentiment for January slipped to 73.2 (Briefing.com consensus 73.5) from the final reading of 74.0 for December. In the same period a year ago, the index stood at 79.0.
    • The key takeaway from the report is that consumers' worries about the future path of inflation increased, which is not what the Fed wants to hear, especially as plans to implement new tariffs loom on the near horizon.
• Commodities:
  • WTI crude: +3.6% to $76.63/bbl
  • Gold: +0.8% to $2713.70/ozt
  • Copper: -0.2% to $4.30/lb
• Currencies:
  • EUR/USD: -0.6% to 1.0242
  • GBP/USD: -0.8% to 1.2209
  • USD/CNH: +0.1% to 7.3634
  • USD/JPY: -0.1% to 157.92
• The Week Ahead:
  • Monday: December Treasury Budget (prior -$367.0 bln) at 14:00 ET
  • Tuesday: December NFIB Small Business Optimism (prior 101.7) at 6:00 ET; December PPI (prior 0.4%) and Core PPI (prior 0.2%) at 8:30 ET
  • Wednesday: Weekly MBA Mortgage Index (prior -3.7%) at 7:00 ET; December CPI (prior 0.3%), Core CPI (prior 0.3%), and January Empire State Manufacturing (prior 0.2) at 8:30 ET; weekly crude oil inventories (prior -959,000) at 10:30 ET; and January Beige Book at 14:00 ET
  • Thursday: December Retail Sales (prior 0.7%), Retail Sales ex-auto (prior 0.2%), weekly Initial Claims (prior 201,000), Continuing Claims (prior 1.867 mln), January Philadelphia Fed survey (prior -16.4), December Import Prices (prior 0.1%), Import Prices ex-oil (prior 0.0%), Export Prices (prior 0.0%), and Export Prices ex-agriculture (prior 0.1%) at 8:30 ET; November Business Inventories (prior 0.1%) at 10:00 ET and January NAHB Housing Market Index (prior 46) at 10:00 ET; and weekly natural gas inventories (prior -40 bcf) at 10:30 ET 
  • Friday: December Housing Starts (prior 1.289 mln), Building Permits (prior 1.505 mln) at 8:30 ET; December Industrial Production (prior -0.1%) and Capacity Utilization (prior 76.8%) at 9:15 ET; and November Long-Term TIC Flows (prior $152.3 bln) at 16:00 ET