Bond Market Update

Early Gains Surrendered After Hot Q3 GDP

• U.S. Treasuries had a mixed showing on Tuesday, as the 5-yr note and shorter tenors reversed from their early highs to record modest losses while the long bond finished in the green, continuing yesterday's show of relative strength. Treasuries started the day in the green after a night that featured gains in most sovereign debt. However, the higher start was reversed almost immediately, with the market sliding into the red after the advance reading of Q3 GDP (4.3%; Briefing.com consensus 3.0%) came in well ahead of expectations. The indication of strong growth at a time when the Fed has been cutting rates invited some concerns about inflation turning out to be more persistent than previously thought, but the market showed resilience, bouncing just before 10s and 30s slipped past their December lows. The long end was at the forefront of a mid-morning bounce that had the 30-yr bond back in the green just an hour after it set a session low. The 10-yr note found resistance near its unchanged level, drifting near that mark into the close while shorter tenors never made it back into the green. The U.S. Treasury followed yesterday's weak 2-yr note sale with a 5-yr note offering that was also a bit disappointing, but record direct takedown prevented an uglier outcome. This week's auction slate will be capped with a sale of $44 bln in 7-yr notes tomorrow morning. Crude oil climbed toward its 50-day moving average (58.99) while the U.S. Dollar Index fell 0.4% to 97.94.
• Yield Check:
  • 2-yr: +2 bps to 3.53%
  • 3-yr: +2 bps to 3.58%
  • 5-yr: +2 bps to 3.73%
  • 10-yr: UNCH at 4.17%
  • 30-yr: -1 bp to 4.83%

• News:
  • The Atlanta Fed started its GDPNow forecast for Q4 at 3.0%.
  • President Trump spoke last night, saying that it would be smart for Venezuela's President Maduro to step down.
  • Markets in Germany, Switzerland, and Italy will be closed entirely tomorrow while markets in the U.K., Spain, and France will close early.
  • European Central Bank policymaker Schnabel said that a rate hike should not be expected any time soon, echoing recent comments from other policymakers.
  • A spokesperson from the Russian government said that the recent talks in Florida about ending the war in Ukraine should not be seen as a breakthrough.
  • Japan's October BoJ Core CPI was up 2.2% yr/yr, as expected (last 2.2%).
  • Singapore's November CPI was up 0.3% m/m (last 0.0%), rising 1.2% yr/yr (expected 1.3%; last 1.2%). November Core CPI was up 1.2% yr/yr, as expected (last 1.2%).
  • Germany's November Import Price Index was up 0.5% m/m (expected 0.2%; last 0.2%) but down 1.9% yr/yr (last -1.4%).
  • Italy's November non-EU trade surplus reached EUR6.92 bln (last surplus of EUR5.32 bln).
  • Spain's November PPI was down 2.5% yr/yr (last 0.8%). Q3 GDP expanded 0.6% qtr/qtr, as expected (last 0.7%), growing 2.8% yr/yr, as expected (last 2.9%).
  • Swiss December ZEW Expectations fell to 6.2 from 12.2.
• Today's Data:
  • Real GDP increased at an annual rate of 4.3% in the third quarter (Briefing.com consensus: 3.0%), paced by the contributions from personal spending and exports. The GDP deflator, meanwhile, increased 3.8% (Briefing.com consensus: 2.7%) following a 2.1% increase in the second quarter.
    • The key takeaway from the report is that the U.S. economy was certainly running on the warm side in Q3. That will stir some concerns about the Fed's recent decision to cut rates in December and the risk of stoking increased inflation in pursuit of keeping the economy on a growth trajectory.
  • Durable goods orders declined 2.2% month-over-month in October (Briefing.com consensus: 0.3%), with transportation equipment orders (-6.5%) acting as the drag. Excluding transportation, durable goods orders increased 0.2% month-over-month (Briefing.com consensus: -1.1%) following an upwardly revised 0.7% increase (from 0.6%) in September.
    • The key takeaway from the report is that it was a better indicator of growth than meets the headline eye, evidenced by the 0.7% month-over-month increase in shipments and 0.5% month-over-month increase in new orders for nondefense capital goods excluding aircraft.
  • Industrial production increased 0.2% month-over-month in November (Briefing.com consensus 0.1%) following a 0.1% decline in October. The capacity utilization rate was 76.0% (Briefing.com consensus 77.4%) versus 75.9% in October. Total industrial production increased 2.5% yr/yr, while the capacity utilization rate was 3.5 percentage points below its long-run average.
    • The key takeaway from the report is that the uptick in November was driven entirely by mining output, which offset the absence of growth in manufacturing output and a 0.4% decline in utilities output.
  • The Conference Board's Consumer Confidence Index dropped to 89.1 in December (Briefing.com consensus 89.0) from an upwardly revised 92.9 (from 88.7) in November. In the same period a year ago, the index stood at 109.5.
    • The key takeaway from the report is that confidence sagged in December due largely to worries about labor market conditions.
  • $70 bln 5-year Treasury note auction results (prior 12-auction average):
    • High yield: 3.747% (3.965%).
    • Bid-to-cover: 2.35 (2.38).
    • Indirect bid: 59.5% (66.2%).
    • Direct bid: 31.7% (22.8%).
• Commodities:
  • WTI crude: +0.6% to $58.40/bbl
  • Gold: +0.8% to $4505.40/ozt
  • Copper: +0.7% to $5.55/lb
• Currencies:
  • EUR/USD: +0.2% to 1.1789
  • GBP/USD: +0.3% to 1.3497
  • USD/CNH: -0.2% to 7.0186
  • USD/JPY: -0.5% to 156.26
• The Day Ahead:
  • 7:00 ET: Weekly MBA Mortgage Index (prior -3.8%)
  • 8:30 ET: Weekly Initial Claims (Briefing.com consensus 226,000; prior 224,000) and Continuing Claims (prior 1.897 mln)
  • 13:00 ET: NYSE early close
  • 14:00 ET: Treasury market early close
• Treasury Auctions:
  • 11:30 ET: $44 bln 7-yr Treasury note auction results