Bond Market Update

Treasuries Rally as Core CPI Decelerates

• U.S. Treasuries climbed on Wednesday with help from a December CPI report, which showed higher headline increase (0.4%; Briefing.com consensus 0.3%) than what was expected by the Briefing.com consensus, but Core CPI eased slightly on a year-over-year basis (to 3.2% from 3.3%). The report was good enough to send yields on 10s and 30s to one-week lows while the 2-yr yield fell past its 200-day moving average (4.336%) to its 50-day moving average (4.271%). Treasuries reached their best levels about two hours after the CPI report crossed the wires, followed by some shallow backtracking as the day went on. The Fed released its Beige Book for January, noting that overall economic activity increased at a slight to moderate pace since the last release. Consumer spending was fueled by strong holiday sales while vehicle sales grew modestly. Construction activity decreased due in part to a higher cost of materials. Manufacturing decreased while residential real estate activity was unchanged. Employment grew in six out of twelve Fed Districts while prices increased modestly. Crude oil recovered its loss from Tuesday while the U.S. Dollar Index fell 0.2% to 109.10.
• Yield Check:
  • 2-yr: -10 bps to 4.26%
  • 3-yr: -13 bps to 4.34%
  • 5-yr: -15 bps to 4.44%
  • 10-yr: -14 bps to 4.65%
  • 30-yr: -11 bps to 4.88%

• News:
  • Israel and Hamas have officially signed a ceasefire that was reported yesterday.
  • The International Energy Agency lowered its 2025 global oil demand growth forecast to 1.05 million barrels per day from 1.1 Mb/d while the supply growth forecast was lowered to 1.8 Mb/d from 1.9 Mb/d.
  • The U.K.'s chief secretary to the Treasury said that there is no need for an emergency spring budget despite the recent weakness in Gilts and the pound.
  • European Central Bank policymaker De Guindos said that the risk has shifted from high inflation to low growth, adding that disinflationary forces are on track.
  • The People's Bank of China injected nearly a trillion yuan through reverse repurchases to offset the impact of tax payments and maturing medium-term loans.
  • Bank of Japan Governor Ueda indicated that next week's policy meeting could result in a rate change.
  • Japan's January Reuters Tankan Index rose to 2 from -1. December Machine Tool Orders were up 11.2% yr/yr (expected 3.0%; last 9.3%). December M2 Money Stock increased 1.3% yr/yr (expected 1.2%; last 1.2%).
  • South Korea's December Unemployment Rate jumped to 3.7% from 2.7%. December trade surplus reached $6.49 bln, as expected (last $5.59 bln) as imports grew 3.3% yr/yr, as expected (last -2.4%) and exports rose 6.6% yr/yr, as expected (last 1.4%). December Import Price Index was up 7.0% yr/yr (last 2.8%) and Export Price Index was up 10.7% yr/yr (last 7.0%).
  • India's December trade deficit reached $21.94 bln (last deficit of $37.84 bln).
  • Eurozone's November Industrial Production was up 0.2% m/m (expected 0.3%; last 0.2%) but down 1.9% yr/yr, as expected (last -1.1%).
  • Germany's December WPI ticked up 0.1% m/m, as expected (last 0.0%), rising 0.1% yr/yr (last -0.6%). 2024 GDP contracted 0.2%, as expected (last -0.3%).
  • U.K.'s December CPI was up 0.3% m/m (expected 0.4%; last 0.1%), rising 2.5% yr/yr (expected 2.6%; last 2.6%). December Core CPI was up 0.3% m/m (expected 0.5%; last 0.0%), rising 3.2% yr/yr (expected 3.4%; last 3.5%). December Input PPI was up 0.1% m/m (expected 0.2%; last 0.0%) but down 1.5% yr/yr (expected -1.3%; last -2.1%) and Output PPI was up 0.1% m/m, as expected (last 0.4%) and up 0.1% yr/yr (expected 0.0%; last -0.5%).
  • France's December CPI was up 0.2% m/m, as expected (last -0.1%), rising 1.3% yr/yr, as expected (last 1.3%).
  • Spain's December CPI was up 0.5% m/m (expected 0.4%; last 0.2%), rising 2.8% yr/yr, as expected (last 2.4%). December Core CPI was up 2.6% yr/yr, as expected (last 2.4%).
• Today's Data:
  • Total CPI increased 0.4% month-over-month in December. That was a tad higher than the Briefing.com consensus estimate, but in-line with consensus estimates seen elsewhere. Core CPI, which excludes food and energy, jumped 0.2% month-over-month, which was in-line with the Briefing.com consensus estimate and slightly better than the consensus estimates seen elsewhere. On a year-over-year basis, total CPI was up 2.9% versus 2.7% in November while core CPI was up 3.2% versus 3.3% in November.
    • The key takeaway from the report for a market worried about inflation heating up again is that these results were better than feared which, at first blush, shrouded the reality that the consumer inflation rate is still running well above the Fed's 2% target (albeit a target tied to the PCE Price Index).
  • The Empire State Manufacturing Survey fell to -12.6 in January (Briefing.com consensus -2.0) from December's revised reading of 2.1 (from 0.2).
  • The weekly MBA Mortgage Index jumped 33.3% after falling 3.7% a week ago. The Purchase Index was up 26.9% while the Refinance Index rose 43.5%.
  • Weekly crude oil inventories decreased by 1.96 mln barrels after decreasing by 959,000 barrels a week ago.
• Commodities:
  • WTI crude: +3.1% to $78.76/bbl
  • Gold: +1.3% to $2717.50/ozt 
  • Copper: +0.9% to $4.39/lb
• Currencies:
  • EUR/USD: -0.1% to 1.0292
  • GBP/USD: +0.2% to 1.2232
  • USD/CNH: +0.1% to 7.3476
  • USD/JPY: -1.0% to 156.46
• The Day Ahead:
  • 8:30 ET: December Retail Sales (Briefing.com consensus 0.5%; prior 0.7%), Retail Sales ex-auto (Briefing.com consensus 0.5%; prior 0.2%), weekly Initial Claims (Briefing.com consensus 212,000; prior 201,000), Continuing Claims (prior 1.867 mln), January Philadelphia Fed survey (Briefing.com consensus -6.0; 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%)
  • 10:00 ET: November Business Inventories (Briefing.com consensus 0.1%; prior 0.1%) and January NAHB Housing Market Index (Briefing.com consensus 45; prior 46)
  • 10:30 ET: Weekly natural gas inventories (prior -40 bcf)