Bond Market Update

Positive Bias Fails to Hold

U.S. Treasuries had a positive bias coming into the cash session, energized by some start-of-year rebalancing activity and a batch of final December manufacturing PMI readings out of China and Europe that, by and large, reflected ongoing softness in manufacturing activity. The overnight strength dissipated at 8:30 a.m. ET, however, following the encouraging initial and continuing jobless claims data out of the U.S. Yields started to move higher after that report and then saw an added bounce mid-morning that lacked a news catalyst. Commodity prices though -- and energy prices in particular -- moved higher, perhaps stoking some inflation worries. Those moves happened despite a surging dollar, which benefited largely at the expense of the euro (EUR/USD -1.0% to 1.0252) and British pound (GBP -1.2% to 1.2372), which got pummeled on growth rate and/or policy rate divergences with the U.S. The U.S. Dollar Index (+0.9% to 109.33) hit its highest level since September 2022.

• Yield Check:
  • 2-yr: +1 bp to 4.25%
  • 3-yr: +1 bp to 4.28%
  • 5-yr: unch at 4.38%
  • 10-yr: +1 bp to 4.58%
  • 30-yr: +2 bps to 4.80%
• News:
  • FBI investigating New Orleans truck attack as act of terrorism; 15 people were killed New Year's Day and dozens more were injured
  • Rep. Thomas Massie needs someone else to join him in order to prevent Rep. Mike Johnson from becoming Speaker of the House, according to The Wall Street Journal
  • Final December manufacturing PMIs out of Europe were little changed from flash estimates that showed an ongoing contraction in manufacturing activity in most countries, except Spain
  • The natural gas pipeline from Russia to Europe was stopped (as expected) after Ukraine refused to renew agreement, according to New York Times
  • ECB President Lagarde called attention to progress made in bringing down inflation and that she hopes the 2% target will be hit in 2025
  • Press reports indicate analysts think the PBOC could delay an RRR cut on account of the continuing weakness in the yuan and falling bond yields
  • Dockworkers will resume negotiations on January 7, according to Bloomberg
  • United Steelworkers Union says Nippon Steel's latest investment / production plan 'does not represent a true commitment to our long-term future'
  • Biden administration to permanently ban new offshore drilling in key coastal waters, defying Trump’s energy agenda, according to Bloomberg
  • Crude oil inventories had a draw of 1.18 mln barrels for the week ended December 27
  • MBA Mortgage Applications for final two weeks of December -21.9% with refinance applications -36% and purchase applications -13% from two weeks before
  • South Korea's finance ministry lowered its 2025 GDP growth forecast to 1.8% from 2.2%
  • China's December Caixin Manufacturing PMI came in lower than expected (50.5 vs 51.6 expected) and signaled a slowdown in the pace of expansion
  • Eurozone's December HCOB Manufacturing PMI 45.1 (expected 45.2; last 45.2)
• Today's Data:
  • Initial jobless claims for the week ending December 28 decreased by 9,000 to 211,000 (Briefing.com consensus 224,000) while continuing jobless claims for the week ending December 21 decreased by 52,000 to 1.844 million.
    • The key takeaway from the report is the low level of initial claims -- a leading indicator -- as that connotes a situation where employers are reluctant to let employees go, which goes hand-in-hand with an optimistic view of business prospects.
  • Total construction spending was unchanged month-over-month in November (Briefing.com consensus 0.2%) following an upwardly revised 0.5% increase (from 0.4%) in October. Total private construction was up 0.1% month-over-month while total public construction declined 0.1% month-over-month. On a year-over-year basis, total construction spending was up 3.0%.
    • The key takeaway from the report is that there wasn't much impulse for construction spending in November, particularly on the nonresidential side of things.
  • The MBA Mortgage Applications Index was down 21.9% from two weeks before with refinance applications down 36% and purchase applications down 13% (note: this data is usually released on a weekly basis, so the actuals, which aren't necessarily good, also aren't as bad as they appear at first blush).
  • December S&P Global US Manufacturing PMI - Final checked in at 49.4 versus the preliminary reading of 48.3 and the final November reading of 49.7. The dividing line between expansion and contraction is 50.0, so the December PMI represents activity contracting at a slightly faster pace than the prior month.
• Commodities:
  • WTI crude: +1.9% to $73.11/bbl
  • Gold: +1.9% to $2668.00/ozt
  • Copper: unch at $4.02/lb
• Currencies:
  • EUR/USD: -1.0% to 1.0252
  • GBP/USD: -1.2% to 1.2372
  • USD/CNH: +0.1% to 7.3418
  • USD/JPY: +0.2% to 157.61
• The Day Ahead:
  • 10:00 ET: December ISM Manufacturing Index (Briefing.com consensus 48.5%; prior 48.4%)
  • 10:30 ET: EIA Natural Gas Inventories (prior -93 bcf)