Bond Market Update

Hot CPI Pressures Rate Cut Hopes

• U.S. Treasuries ended Wednesday with sharp losses across the curve, sliding to new lows for the month after the release of a hotter-than-expected CPI for January (0.5%; Briefing.com consensus 0.3%), which lifted the yr/yr CPI rate to 3.0% from 2.9%. Core CPI was up 0.4% in January (Briefing.com consensus 0.3%) with the yr/yr rate increasing to 3.3% from 3.2%. The post-data slide pushed back the market's rate cut expectations into September from July. Fed Chairman Powell was on Capitol Hill for his second day of testimony, which usually doesn't generate headlines. Today, the Fed Chairman was asked about the CPI report, but he cautioned against reading too much into one reading, reminding that the Fed uses the PCE Index when evaluating inflation. Treasuries inched off their lows as the day went on, but the shallow bounce found resistance when the U.S. Treasury held a subpar $42 bln 10-yr note auction. Crude oil fell back below its 50-day moving average (72.39) while the U.S. Dollar Index was unchanged at 107.95.
• Yield Check:
  • 2-yr: +8 bps to 4.37%
  • 3-yr: +9 bps to 4.40%
  • 5-yr: +11 bps to 4.48%
  • 10-yr: +10 bps to 4.64%
  • 30-yr: +9 bps to 4.84%

• News:
  • President Trump spoke with Russia's President Putin about starting negotiations to end the war in Ukraine. President Trump then spoke with Ukraine's President Zelensky, saying that he will send Vice President Vance and Secretary of State Rubio to a meeting in Munich to begin negotiations on Friday.
  • China is reportedly tightening rules on new copper smelters to reduce overcapacity.
  • Bank of France expects domestic growth of just 0.1% to 0.2% in Q1.
  • Japan's January M2 Money Stock was up 1.3% yr/yr, as expected (last 1.3%), and January Machine Tool Orders rose 4.7% yr/yr (last 12.6%).
  • India's January CPI was up 4.31% yr/yr (expected 4.60%; last 5.22%). December Industrial Production rose 3.2% yr/yr (expected 3.9%; last 5.0%) and Manufacturing Output rose 3.0% m/m (last 5.5%).
  • Italy's December Industrial Production was down 3.1% m/m (expected -0.1%; last 0.3%), falling 7.1% yr/yr (last -1.6%).
• Today's Data:
  • Total CPI increased 0.5% month-over-month in January (Briefing.com consensus 0.3%) following a 0.4% increase in December. Core CPI, which excludes food and energy, increased 0.4% month-over-month (Briefing.com consensus 0.3%) following a 0.2% increase in December. On a year-over-year basis, total CPI was up 3.0%, versus 2.9% in December, while core CPI was up 3.3%, versus 3.2% in December.
    • The key takeaway from the report is that the inflation readings moved in the wrong direction for the Fed's policy comfort (and that's before any possible impact from tariff actions), which will keep the market on edge about the Fed perhaps not cutting rates at all this year or maybe even having to keep a rate hike on its policy deliberation table.
  • The Treasury Budget for January showed a deficit of $128.6 billion compared to a deficit of $21.9 billion in the same period a year ago. The January deficit resulted from outlays ($641.9 billion) exceeding receipts ($513.3 billion). The Treasury Budget data are not seasonally adjusted so the January deficit cannot be compared to the December deficit of $86.7 billion.
    • The key takeaway from the report is that the deficit in early fiscal 2025 is 57.9% greater than the deficit for the same period in fiscal 2024.
  • The weekly MBA Mortgage Index rose 2.3% after increasing 2.2% a week ago. The Refinance Index rose 9.6% while the Purchase Index fell 2.3%.
  • Weekly crude oil inventories increased by 4.07 mln barrels after increasing by 8.66 mln barrels a week ago.
  • $42 bln 10-year Treasury note auction results (prior 12-auction average):
    • High yield: 4.632% (4.243%).
    • Bid-to-cover: 2.48 (2.54).
    • Indirect bid: 71.5% (67.2%).
    • Direct bid: 13.6% (18.1%).
• Commodities:
  • WTI crude: -2.7% to $71.37/bbl
  • Gold: -0.2% to $2928.10/ozt
  • Copper: +2.2% to $4.70/lb
• Currencies:
  • EUR/USD: +0.3% to 1.0388
  • GBP/USD: UNCH at 1.2442
  • USD/CNH: +0.1% to 7.3123
  • USD/JPY: +1.3% to 154.45
• The Day Ahead: 
  • 8:30 ET: January PPI (Briefing.com consensus 0.2%; prior 0.2%), January Core PPI (Briefing.com consensus 0.3%; prior 0.0%), weekly Initial Claims (Briefing.com consensus 217,000; prior 219,000), and Continuing Claims (prior 1.886 mln)
  • 10:30 ET: Weekly natural gas inventories (prior -174 bcf)
• Treasury Auctions:
  • 13:00 ET: $25 bln 30-yr Treasury bond auction results