Bond Market Update

Little Changed in January Despite Tariff Uncertainty

• U.S. Treasuries finished the week on a lower note after a late retreat from sideways action that dominated the bulk of the session. The trading day started with slim losses that were reversed in reaction to the morning release of in-line Personal Income/Outlays for December and the Employment Cost Index for Q4. The opening bounce was followed by sideways trade near the unchanged level across all tenors, but the market slid from highs to fresh lows after the White House disputed a Reuters report, which claimed that President Trump will delay the implementation of tariffs to March 1 from February 1. Instead, the White House confirmed that tariffs remain on track to be implemented tomorrow. Imports from Mexico and Canada will be subject to a 25% tariff while imports from China will be subject to a 10% tariff. The late pullback caused the long bond to turn negative for the month while other tenors finished January with slim gains or no gains. The 2s10s spread ended the month at 33 bps, just one basis point wider from where it was at the end of December. Crude oil slipped back toward its 50-day moving average (72.10), narrowing its January gain to just $0.70, or 1.0%, while the U.S. Dollar Index rose 0.5% to 108.38, narrowing this month's loss to just 0.1%.
• Yield Check:
  • 2-yr: +4 bps to 4.24% (-3 bps this week; -1 bp in January)
  • 3-yr: +4 bps to 4.28% (-5 bps this week; UNCH in January)
  • 5-yr: +5 bps to 4.36% (-7 bps this week; -2 bps in January)
  • 10-yr: +6 bps to 4.57% (-6 bps this week; UNCH in January)
  • 30-yr: +6 bps to 4.81% (-4 bps this week; +2 bps in January)

• News:
  • The Atlanta Fed initiated its GDPNow forecast for Q1 GDP at 2.9%.
  • Chicago Fed President Goolsbee said that inflation is on track to slow to 2.0% and that he still believes that rates will be lower in 12-18 months.
  • The U.S. government is launching a probe to see if DeepSeek evaded restrictions on exports of advanced chips to China by purchasing them through Singapore.
  • There is speculation that the European Central Bank will announce another rate cut in March and stop referring to its policy as "restrictive."
  • The European Central Bank's December Survey of Professional Forecasters raised the harmonized inflation forecast for the eurozone to 2.1% from 1.9% and cut the GDP growth forecast to 1.0% from 1.2%.
  • Japan's January Tokyo CPI was up 3.4% yr/yr (last 3.0%) and Tokyo Core CPI was up 2.5% yr/yr, as expected (last 2.4%). December Retail Sales rose 3.7% yr/yr (expected 3.4%; last 2.8%), December Industrial Production ticked up 0.3% m/m (expected -0.1%; last -2.2%), December jobs/applications ratio remained at 1.25, as expected, and December Unemployment Rate fell to 2.4% from 2.5% (expected 2.5%). December Housing Starts fell 2.5% yr/yr (expected -3.7%; last -1.8%) and Construction Orders rose 8.1% yr/yr (last -10.2%).
  • India's December Infrastructure Output was up 4.0% yr/yr (last 4.3%). December Bank Loans grew 11.5% yr/yr (last 11.2%) and Deposits Grew 10.8% yr/yr (last 9.8%).
  • Singapore's December Bank Lending reached SGD835.0 bln (last SGD819.4 bln). Q4 Business Expectations decreased to 7.0 from 10.0.
  • Australia's Q4 PPI was up 0.8% qtr/qtr (expected 1.0%; last 1.0%), rising 3.7% yr/yr (last 3.9%). December Housing Credit was up 0.5% m/m, as expected (last 0.5%).
  • Germany's December Retail Sales fell 1.6% m/m (expected 0.0%; last -0.1%) but were up 1.8% yr/yr (expected 2.5%; last 2.9%). January Unemployment increased by 11,000 (expected 14,000; last 10,000) and Unemployment Rate rose to 6.2% from 6.1%, as expected. Flash January CPI was down 0.2% m/m (expected 0.1%; last 0.5%) but up 2.3% yr/yr (expected 2.6%; last 2.6%).
  • U.K.'s January Nationwide HPI was up 0.1% m/m (expected 0.3%; last 0.7%), rising 4.1% yr/yr (expected 4.3%; last 4.7%).
  • France's January CPI was down 0.1% m/m (expected 0.0%; last 0.2%) but up 1.4% yr/yr (expected 1.5%; last 1.3%). December PPI was up 1.0% m/m (last 3.7%) but down 3.8% yr/yr (last -4.7%).
  • Italy's December PPI was up 0.6% m/m (last 1.2%), rising 1.1% yr/yr (last -0.5%).
  • Spain's December Retail Sales rose 4.0% yr/yr (expected 0.5%; last 0.9%). November Current Account surplus reached EUR1.26 bln (last surplus of EUR4.93 bln).
  • Swiss December Retail Sales rose 2.6% yr/yr (expected 0.6%; last 1.4%).
• Today's Data:
  • Personal income increased 0.4% month-over-month in December, as expected, following a 0.3% increase in November. Personal spending jumped 0.7% month-over-month (Briefing.com consensus 0.5%) on the heels of an upwardly revised 0.6% increase (from 0.4%) in November. The PCE Price Index rose 0.3% month-over-month, as expected, leaving it up 2.6% year-over-year versus 2.4% in November. The core-PCE Price Index increased 0.2% month-over-month, as expected, leaving it up 2.8% year-over-year for the third month in a row.
    • The key takeaway from the report is that consumer spending is strong (which we knew from the Adv. Q4 GDP report) and that inflation is sticky above the Fed's 2% target, making it clear why the Fed said it isn't in a hurry to adjust its policy stance.
  • The Q4 Employment Cost Index showed compensation costs for civilian workers increased 0.9% (Briefing.com consensus 0.9%), seasonally adjusted, for the three-month period ending in December 2024 versus 0.8% for the third quarter.
    • The key takeaway from the report is that compensation costs moderated to 3.8% for the 12-month period ending in December 2024 from 4.2% for the 12-month period ending in December 2023.
  • The Chicago PMI rose to 39.5 in January (Briefing.com consensus 41.5) from 36.9 in December.
• Commodities:
  • WTI crude: -0.4% to $72.46/bbl
  • Gold: -0.4% to $2834.10/ozt
  • Copper: -0.9% to $4.27/lb
• Currencies:
  • EUR/USD: -0.2% to 1.0370
  • GBP/USD: -0.2% to 1.2391
  • USD/CNH: +0.3% to 7.3147
  • USD/JPY: +0.6% to 155.18
• The Week Ahead:
  • Monday: Final January S&P Global U.S. Manufacturing PMI (prior 50.1) at 9:45 ET; December Construction Spending (prior 0.0%) and January ISM Manufacturing Index (prior 49.3%) at 10:00 ET
  • Tuesday: December job openings (prior 8.098 mln) and December Factory Orders (prior -0.4%) at 10:00 ET
  • Wednesday: Weekly MBA Mortgage Index (prior -2.0%) at 7:00 ET; January ADP Employment Change (prior 122,000) at 8:15 ET; December Trade Balance (prior -$78.2 bln) at 8:30 ET; final January S&P Global U.S. Services PMI (prior 52.8) at 9:45 ET; January ISM Services (prior 54.1%) at 10:00 ET; and weekly crude oil inventories (prior +3.46 mln) at 10:30 ET
  • Thursday: Preliminary Q4 Productivity (prior 2.2%) and Unit Labor Costs (prior 0.8%), weekly Initial Claims (prior 207,000), and Continuing Claims (prior 1.858 mln) at 8:30 ET; and weekly natural gas inventories (prior -321 bcf) at 10:30 ET
  • Friday: January Nonfarm Payrolls (prior 256,000), Nonfarm Private Payrolls (prior 223,000), Average Hourly Earnings (prior 0.3%), Unemployment Rate (prior 4.1%), and Average Workweek (prior 34.3) at 8:30 ET; preliminary February University of Michigan Consumer Sentiment (prior 71.1); December Wholesale Inventories (prior -0.2%) at 10:00 ET; and December Consumer Credit (prior -$7.5 bln) at 15:00 ET