Bond Market Update

Three-Day Streak Snapped Ahead of Long Weekend

• U.S. Treasuries finished a solid week on a modestly lower note, backing down from their morning highs after the release of good economic data. Treasuries were on track for their fourth consecutive day of gains after a night that saw the release of China's 2024 GDP that matched the 5.0% target and ongoing speculation about a rate hike from the Bank of Japan at the end of next week. In Europe, there were growing hopes for multiple rate cuts from the Bank of England after the release of weak Retail Sales for December (-0.3%; expected 0.4%). Treasuries notched their highs at the open with yields touching their lowest levels in about two weeks, but the entire complex began backpedaling after the market received above-consensus Housing Starts (1.499 mln; Briefing.com consensus 1.318 mln) and Building Permits (1.483 mln; Briefing.com consensus 1.454 mln) for December. Treasuries faced a bit more pressure after the release of strong Industrial Production for December (0.9%; Briefing.com consensus 0.3%), but action stabilized shortly after longer tenors returned to little changed. The trading range narrowed considerably as the day went on, leading into Monday's closure for Martin Luther King Jr Day. Monday will also mark the inauguration of Donald Trump as the 47th president and there has been speculation that Mr. Trump will sign multiple executive orders on that day. Longer tenors outperformed this week, compressing the 2s10s spread by four basis points to 34 bps. Crude oil dipped today, but still gained nearly 1.0% for the week, while the U.S. Dollar Index rose 0.4% to 109.34, trimming this week's loss to 0.3%.
• Yield Check:
  • 2-yr: +3 bps to 4.27% (-13 bps this week)
  • 3-yr: +3 bps to 4.33% (-15 bps this week)
  • 5-yr: +2 bps to 4.41% (-18 bps this week)
  • 10-yr: UNCH at 4.61% (-17 bps this week)
  • 30-yr: UNCH at 4.85% (-12 bps this week)

• News:
  • The International Monetary Fund increased its global growth forecast for 2025 to 3.3% from 3.2%, expecting 2026 growth of 3.3%. The 2025 growth outlook for the U.S. was increased to 2.7% from 2.2%.
  • French Prime Minister Bayrou survived a no-confidence vote.
  • European Central Bank policymaker Stournaras spoke in favor of a series of rate cuts at upcoming ECB meetings.
  • China Securities Times released a poll of 60 economists, predicting 2025 growth of at least 4.8%.
  • China's Q4 GDP expanded 1.6% qtr/qtr, as expected (last 1.3%), growing 5.4% yr/yr (expected 5.0%; last 4.6%). 2024 GDP grew 5.0% (last 4.8%). December Industrial Production was up 6.2% yr/yr (expected 5.4%; last 5.4%), December Retail Sales rose 3.7% yr/yr (expected 3.5%; last 3.0%), and December Unemployment Rate ticked up to 5.1% from 5.0% (expected 5.0%). December Fixed Asset Investment was up 3.2% yr/yr (expected 3.3%; last 3.3%) and December House Prices fell 5.3% yr/yr (last -5.7%). 
  • Singapore's December trade surplus reached SGD3.85 bln (last surplus of SGD6.49 bln) as non-oil exports grew 1.7% m/m (last 14.7%), increasing 9.0% yr/yr (last 3.4%). · New Zealand's December Business PMI hit 45.9 (last 45.2).
  • Eurozone's December CPI was up 0.4% m/m, as expected (last -0.3%), rising 2.4% yr/yr, as expected (last 2.2%). December Core CPI was up 0.5% m/m, as expected (last -0.6%), rising 2.7% yr/yr, as expected (last 2.7%). November Current Account surplus reached EUR27.0 bln (expected surplus of EUR28.0 bln; last surplus of EUR25.8 bln).
  • U.K.'s December Retail Sales were down 0.3% m/m (expected 0.4%; last 0.1%) but up 3.6% yr/yr (expected 4.2%; last 0.0%). December Core Retail Sales were down 0.6% m/m (expected 0.1%; last 0.1%) but up2.9% yr/yr (expected 3.6%; last -0.5%).
• Today's Data:
  • Total housing starts increased 15.8% month-over-month in December to a seasonally adjusted annual rate of 1.499 million units (Briefing.com consensus 1.318 million). Total building permits were down 0.7% month-over-month to a seasonally adjusted annual rate of 1.483 million (Briefing.com consensus 1.454 million).
    • The key takeaway from the report is that there were gains in single-unit starts (+3.3%) and single-unit permits (+1.6%), which is encouraging for a housing market that needs new supply to compensate for the limited inventory in the existing home market.
  • Total industrial production increased 0.9% month-over-month in December (Briefing.com consensus 0.3%) following an upwardly revised 0.2% increase (from -0.1%) in November. The capacity utilization rate jumped to 77.6% (Briefing.com consensus 77.0%) from an upwardly revised 77.0% (from 76.8%) in November. Total industrial production increased 0.5% yr/yr while the capacity utilization rate was 2.1 percentage points below its long-run average.
    • The key takeaway from the report is that industrial production showed some rebound verve after being depressed in recent months by the hurricanes and the Boeing strike.
• Commodities:
  • WTI crude: -0.6% to $77.32/bbl
  • Gold: -0.1% to $2748.50/ozt
  • Copper: -1.6% to $4.36/lb
• Currencies:
  • EUR/USD: -0.2% to 1.0277
  • GBP/USD: -0.6% to 1.2169
  • USD/CNH: UNCH at 7.3461
  • USD/JPY: +0.6% to 156.13
• The Week Ahead:
  • Monday: Bond and equity markets closed for Martin Luther King Jr Day (Inauguration Day) 
  • Tuesday: Nothing of note
  • Wednesday: Weekly MBA Mortgage Index (prior 33.3%) at 7:00 ET; December Leading Indicators (Briefing.com consensus 0.0%; prior 0.3%) at 10:00 ET; weekly crude oil inventories (prior -1.96 mln) at 10:30 ET; and $13 bln 20-yr Treasury bond reopening results at 13:00 ET
  • Thursday: Weekly Initial Claims (Briefing.com consensus 219,000; prior 217,000) and Continuing Claims (prior 1.859 mln) at 8:30 ET; and weekly natural gas inventories (prior -258 bcf) at 10:30 ET 
  • Friday: Flash January S&P Global U.S. Manufacturing PMI (prior 49.4) and flash January S&P Global U.S. Services PMI (prior 56.8) at 9:45 ET; December Existing Home Sales (prior 4.15 mln) and final January University of Michigan Consumer Sentiment (prior 74.0) at 10:00 ET