Bond Market Update

October Highs in Sight Despite Weak Auction

• U.S. Treasuries climbed again on Tuesday, making for their fourth consecutive advance that sent yields on 10s and shorter tenors toward their October lows. The trading day started with modest gains after a quiet night in global markets. The Treasury complex spent morning trade in a sideways range, showing a muted reaction to a sizable batch of economic data that finally made its way into the public eye. September PPI (0.3%; Briefing.com consensus 0.3%) matched expectations, though Core PPI (0.1%; Briefing.com consensus 0.2%) was slightly cooler than expected. Retail Sales growth (0.2%; Briefing.com consensus 0.4%) underwhelmed in September while Consumer Confidence (88.7; Briefing.com consensus 93.3) weakened in November, missing expectations. Treasuries overtook their morning highs around noon when Bloomberg reported that NEC Director Hassett appears to be the frontrunner to be nominated to replace Fed Chairman Powell. Around that same time, Bloomberg reported that Fed Governor Miran does not plan to dissent in favor of a 50-basis point rate cut at the December FOMC meeting just to make a point since a close call for a potential 25-basis point cut is expected. Treasuries held at their best levels of the day through a $70 bln 5-yr note sale, even though the auction met underwhelming demand. The long bond backed down from its high in late trade, returning to its opening level, while shorter tenors finished closer to their midday highs with the 10-yr yield settling just five basis points above its October low. Crude oil gave back yesterday's gain while the U.S. Dollar Index fell 0.5% to 99.68.
• Yield Check:
  • 2-yr: -5 bps to 3.46%
  • 3-yr: -4 bps to 3.45%
  • 5-yr: -4 bps to 3.57%
  • 10-yr: -4 bps to 4.00%
  • 30-yr: -2 bps to 4.66%

• News:
  • President Trump expressed optimism about his plan to end the Russia-Ukraine war, but there is reportedly some skepticism whether Russia will find the deal acceptable.
  • Japan's Prime Minister Takaichi held an unexpected phone call with President Trump to discuss diplomatic relations with China.
  • South Korea's ruling party is expected to present the US Investment Act to the National Assembly this week.
  • South Korea's November Consumer Confidence rose to 112.4 from 109.8.
  • Hong Kong's October trade deficit reached HKD39.9 bln (last deficit of HKD50.2 bln) as imports rose 18.3% m/m (last 13.6%) and exports increased 17.5% m/m (last 16.1%).
  • Germany's Q3 GDP was unchanged qtr/qtr, as expected (last -0.2%), expanding 0.3% yr/yr, as expected (last 0.3%).
  • U.K.'s November CBI Distributive Trades Survey fell to -32 from -27 (expected -29).
  • France's November Consumer Confidence fell to 89 from 90.
  • Spain's October PPI was up 0.7% yr/yr (last 0.3%).
• Today's Data:
  • The Producer Price Index for final demand increased 0.3% month-over-month in September (Briefing.com consensus: 0.3%) following a 0.1% decline in August. That left the year-over-year change at 2.7% versus 2.6% in August. The Producer Price Index for final demand, less foods and energy, increased just 0.1% month-over-month (Briefing.com consensus: 0.2%) following a 0.1% decline in August. That left the year-over-year change at 2.6% versus 2.8% in August.
    • The key takeaway from the report is that inflation at the wholesale level is still sticky, highlighted by a 1.1% month-over-month increase in the final demand foods index, which was up 4.0% year-over-year, shedding light on why many consumers, seeing the pass-through at grocery stores, are not aligned with the thinking that inflation is being brought under control.
  • Retail sales were up 0.2% month-over-month in September (Briefing.com consensus 0.4%) after increasing 0.6% in August. Excluding autos, retail sales were up 0.3%, as expected, following a downwardly revised 0.6% increase (from 0.7%) in August.
    • The key takeaway is that gasoline station sales were a big driver of the monthly increase. Excluding gasoline station sales, retail sales were flat in September after increasing 0.6% in August, signaling a slowdown in consumer spending on goods.
  • The Conference Board's Consumer Confidence Index dropped to 88.7 in November (Briefing.com consensus 93.3) from an upwardly revised 95.5 (from 94.6) in October. In the same period a year ago, the index stood at 112.8.
    • The key takeaway from the report is that there was a further deterioration in the expectations index, with sentiment on business conditions, labor market conditions, and household income all trending negatively. That could portend a slowdown in discretionary spending activity.
  • The FHFA Housing Price Index was unchanged in September (Briefing.com consensus 0.3%) after increasing 0.4% in August.
  • The S&P Case-Shiller Home Price Index was up 1.4% year-over-year in September (Briefing.com consensus 1.6%), down from a 1.6% increase in August.
  • Pending Home Sales rose 1.9% in November (Briefing.com consensus 0.0%) after increasing a revised 0.1% (from 0.0%) in October.
  • $70 bln 5-year Treasury note auction results (prior 12-auction average):
    • High yield: 3.562% (4.018%).
    • Bid-to-cover: 2.41 (2.38).
    • Indirect bid: 61.3% (66.4%).
    • Direct bid: 27.6% (22.6%).
• Commodities:
  • WTI crude: -1.5% to $58.00/bbl
  • Gold: +1.1% to $4140.30/ozt
  • Copper: +2.4% to $5.09/lb
• Currencies:
  • EUR/USD: +0.5% to 1.1579
  • GBP/USD: +0.8% to 1.3209
  • USD/CNH: -0.3% to 7.0814
  • USD/JPY: -0.6% to 155.89
• The Day Ahead:
  • 7:00 ET: Weekly MBA Mortgage Index (prior -5.2%)
  • 8:30 ET: September Durable Orders (Briefing.com consensus 0.3%; prior 2.9%), Durable Orders ex-transport (Briefing.com consensus 0.2%; prior 0.4%), weekly Initial Claims (Briefing.com consensus 225,000; prior 220,000), and Continuing Claims (prior 1.974 mln)
  • 9:45 ET: November Chicago PMI (Briefing.com consensus 44.5; prior 43.8)
  • 10:30 ET: Weekly crude oil inventories (prior -3.43 mln)
  • 12:00 ET: Weekly natural gas inventories (prior -14 bcf)
  • 14:00 ET: November Beige Book
• Treasury Auctions:
  • 13:00 ET: $44 bln 7-yr Treasury note auction results