Bond Market Update

Below-Consensus PPI Boosts Short End

• U.S. Treasuries ended Tuesday on a modestly higher note, though the market had a difficult time hanging onto gains that were recorded in response to a cooler-than-expected December PPI (0.2%; Briefing.com consensus 0.3%) and core PPI (0.0%; Briefing.com consensus 0.2%). Treasuries started the day with slim gains that were extended in immediate reaction to the PPI report, but the 10-yr note and the 30-yr bond were back to their pre-PPI levels just 30 minutes after the report crossed the wires while shorter tenors did a better job defending their gains. The rest of the session saw continued pressure on longer tenors which lifted yields on 10s and 30s to fresh highs for the month while the 2-yr note resisted that pressure, inching back to its post-PPI high just ahead of the close. The day's news flow was relatively light, but there was some focus on last night's report from Bloomberg that the incoming Trump administration may implement tariff hikes in a staggered manner, rather than a one-time increase. If realized, that action would likely lead to a front-loading of purchases from overseas in order to avoid higher costs down the line. Crude oil pulled back from its highest level since mid-August while the U.S. Dollar Index fell 0.6% to 109.28, sliding from levels not seen since November 2022.
• Yield Check:
  • 2-yr: -4 bps to 4.36%
  • 3-yr: -3 bps to 4.47%
  • 5-yr: -3 bps to 4.59%
  • 10-yr: -2 bps to 4.79%
  • 30-yr: UNCH at 4.98%

• News:
  • Israel and Hamas have agreed to a cease fire and hostage exchange, according to CBS.
  • European Central Bank policymaker Rehn said that rate cuts will continue taking place, though the threat of tariffs from the incoming Trump administration poses a risk to the overall outlook.
  • Bank of France continues expecting no growth in the domestic economy for Q4.
  • BP reduced its outlook for upstream production for Q4.
  • Spain is reportedly planning a 100% tax for property purchases by non-EU residents.
  • Bank of Japan Deputy Governor Himino delivered a speech that was deemed as dovish ahead of next Friday's policy update, though he added that the central bank does not like to tip its hand when it comes to upcoming decisions.
  • China's December New Loans reached CNY990.0 bln (expected CNY890.0 bln; last CNY580.0 bln). December Outstanding Loans grew 7.6% yr/yr, as expected (last 7.7%) and December total social financing reached CNY2.86 trln (expected CNY2.00 trln; last CNY2.34 trln).
  • Japan's December Bank Lending was up 3.1% yr/yr, as expected (last 2.9%). November Current Account surplus reached JPY3.03 trln (expected surplus of JPY2.59 trln; last surplus of JPY2.41 trln). December Economy Watchers Current Index rose to 49.9 from 49.4 (expected 49.4).
  • India's December WPI Inflation was up 2.37% yr/yr (expected 2.30%; last 1.89%) and WPI Manufacturing Inflation was up 2.14% (last 2.00%).
  • Australia's January Westpac Consumer Sentiment was down 0.7% (last -2.0%). November Building Approvals decreased 3.6% m/m, as expected (last 5.2%) and Private House Approvals decreased 1.7% m/m, as expected (last -4.0%).
  • New Zealand's Q4 NZIER Business Confidence was up 16% (last -1%).
  • France's November government budget deficit reached EUR172.5 bln (last deficit of EUR157.4 bln).
  • Italy's November Industrial Production was up 0.3% m/m (expected 0.0%; last 0.1%) but down 1.5% yr/yr (last -3.5%).
• Today's Data:
  • The Producer Price Index for final demand increased 0.2% month-over-month in December (Briefing.com consensus 0.3%), leaving it up 3.3% year-over-year versus 3.0% in November. Excluding food and energy, the index for final demand was unchanged month-over-month (Briefing.com consensus 0.2%), leaving it up 3.5% year-over-year versus 3.5% in November.
    • The key takeaway from the report is that the better-than-expected monthly readings have been clouded by the less inspiring year-over-year readings, as well as the understanding that inflation at the wholesale level moved in the wrong direction in 2024 (versus 2023) and remains elevated relative to the Fed's 2% inflation target.
  • The Treasury Budget for December showed a deficit of $86.7 billion compared to a deficit of $129.4 billion in the same period a year ago. The December deficit resulted from outlays ($541 billion) exceeding receipts ($454 billion). The Treasury Budget data are not seasonally adjusted so the December deficit cannot be compared to the November deficit of $366.7 billion.
    • The key takeaway from the report is that the deficit in early fiscal 2025 is 39.4% greater than the deficit for the same period in fiscal 2024.
  • The NFIB Small Business Optimism Index rose to 105.1 in December from 101.7 in November.
• Commodities:
  • WTI crude: -3.3% to $76.40/bbl
  • Gold: +0.1% to $2683.90/ozt
  • Copper: +0.5% to $4.35/lb
• Currencies:
  • EUR/USD: +0.5% to 1.0298
  • GBP/USD: UNCH at 1.2197
  • USD/CNH: UNCH at 7.3450
  • USD/JPY: +0.3% to 157.90
• The Day Ahead:
  • 7:00 ET: Weekly MBA Mortgage Index (prior -3.7%)
  • 8:30 ET: December CPI (Briefing.com consensus 0.3%; prior 0.3%), Core CPI (Briefing.com consensus 0.2%; prior 0.3%), and January Empire State Manufacturing (Briefing.com consensus -2.0; prior 0.2)
  • 10:30 ET: Weekly crude oil inventories (prior -959,000)
  • 14:00 ET: January Beige Book