Bond Market Update

Treasuries Climb Despite Hot PPI

• U.S. Treasuries finished Thursday with solid gains across the curve and leadership from the long end despite the release of a hotter than expected PPI for January (0.4%; Briefing.com consensus 0.2%). Treasuries started the trading session with gains after a night that saw an upward climb in futures alongside other sovereign debt. The gains were extended after the release of the PPI report, which showed a decrease in the yr/yr growth rate to 3.6% from 3.7%, but only because the December PPI reading was revised up to 0.4% from 0.0%. The sharp upward revision to December figures likely gave the market some hope that the inflationary uptick in January was just a brief speed bump. Treasuries continued building on their gains throughout the day, climbing through an unimpressive $25 bln 30-yr bond auction. The advance left yields on 10s and 30s below levels seen before yesterday's release of the CPI report while yields on shorter tenors are now just a bit above levels seen before the CPI report crossed the wires. On the tariff front, President Trump announced that reciprocal tariffs will be imposed after an assessment period. Crude oil marked a fresh low for the year just above $70/bbl before reclaiming the bulk of its loss, while the U.S. Dollar Index fell 0.6% to 107.30.
• Yield Check:
  • 2-yr: -6 bps to 4.31%
  • 3-yr: -7 bps to 4.33%
  • 5-yr: -10 bps to 4.39%
  • 10-yr: -11 bps to 4.53%
  • 30-yr: -10 bps to 4.73%

• News:
  • Japan's Prime Minister Ishiba said that there are no current plans to review the government's accord with the Bank of Japan.
  • The European Central Bank's latest economic bulletin reaffirmed expectations for inflation slowing to 2.0% this year.
  • Japan's January PPI was up 0.3% m/m, as expected (last 0.4%), rising 4.2% yr/yr (expected 4.0%; last 3.9%).
  • Australia's MI Inflation Expectations increased to 4.6% from 4.0%.
  • New Zealand's January Electronic Card Retail Sales were down 1.6% m/m (last 2.4%), falling 0.5% yr/yr (last -1.0%). Q1 Inflation Expectations remained at 2.1%.
  • Eurozone's December Industrial Production was down 1.1% m/m (expected -0.6%; last 0.4%), falling 2.0% yr/yr (expected -3.1%; last -1.8%).
  • Germany's January CPI was down 0.2% m/m, as expected (last 0.5%) but up 2.3% yr/yr, as expected (last 2.6%).
  • U.K.'s Q4 GDP grew 0.1% qtr/qtr (expected -0.1%; last 0.0%), increasing 1.5% yr/yr (expected 1.0%; last 1.1%). Q4 Business Investment was down 3.2% qtr/qtr (expected -0.4%; last 1.9%), falling 0.7% yr/yr (last 4.4%). December Construction Output was down 0.2% m/m (expected 0.2%; last 0.6%) but up 1.5% yr/yr (expected 1.1%; last 1.0%). December Industrial Production rose 0.5% m/m (expected 0.2%; last -0.5%) but was down 1.9% yr/yr (expected -2.1%; last -2.0%). December Manufacturing Production was up 0.7% m/m (expected 0.0%; last -0.3%) but down 1.4% yr/yr (expected -1.9%; last -1.1%). December trade deficit reached GBP17.45 bln (expected deficit of GBP18.60 bln; last deficit of GBP18.90 bln).
  • Swiss January CPI was down 0.1% m/m, as expected (last -0.1%) but up 0.4% yr/yr, as expected (last 0.6%).
• Today's Data:
  • The Producer Price Index for final demand increased 0.4% month-over-month (Briefing.com consensus 0.2%) following an upwardly revised 0.5% increase (from 0.2%) in December. Excluding food and energy, the index for final demand increased 0.3% month-over-month (Briefing.com consensus 0.3%) following an upwardly revised 0.4% increase (from 0.0%) in December. On a year-over-year basis, the index for final demand was up 3.5% (3.51% unrounded) versus 3.5% in December (3.46% unrounded). Excluding food and energy, the index for final demand was up 3.6% (3.61% unrounded) versus 3.7% in December (3.75% unrounded).
    • The key takeaway from the report is that the month-over-month readings were less upsetting than the month-over-month readings seen in the CPI report. Also, the year-over-year readings look improved at first blush, yet the revisions moved the December year-over-year readings for PPI and core PPI higher (versus the initial readings), so the improvement in January is from a higher base, meaning it is relative and not absolute.
    • (Sidenote: when the December PPI report was first released, PPI was up 3.3% year-over-year and core PPI was up 3.5%)
  • Initial jobless claims for the week ending February 8 decreased by 7,000 to 213,000 (Briefing.com consensus 217,000) while continuing jobless claims for the week ending February 1 decreased by 36,000 to 1.850 million.
    • The key takeaway from the report is the low level of initial jobless claims, which continue to connote an otherwise positive demand outlook on the part of employers who are reluctant to cut staff.
  • Weekly natural gas inventories decreased by 100 bcf after decreasing by 174 bcf a week ago.
  • $25 bln 30-year Treasury bond auction results (prior 12-auction average):
    • High yield: 4.748% (4.451%).
    • Bid-to-cover: 2.33 (2.44).
    • Indirect bid: 65.1% (67.0%).
    • Direct bid: 18.6% (18.2%).
• Commodities:
  • WTI crude: -0.1% to $71.31/bbl
  • Gold: +0.6% to $2945.30/ozt
  • Copper: +1.5% to $4.77/lb
• Currencies:
  • EUR/USD: +0.6% to 1.0446
  • GBP/USD: +0.8% to 1.2544
  • USD/CNH: -0.4% to 7.2758
  • USD/JPY: -0.9% to 152.91
• The Day Ahead:
  • 8:30 ET: January Retail Sales (Briefing.com consensus 0.0%; prior 0.4%), Retail Sales ex-auto (Briefing.com consensus 0.3%; prior 0.4%), and January Export Prices (prior 0.3%), Export Prices ex-agriculture (prior 0.3%), Import Prices (prior 0.1%), and Import Prices ex-oil (prior 0.1%)
  • 9:15 ET: January Industrial Production (Briefing.com consensus 0.3%; prior 0.9%) and Capacity Utilization (Briefing.com consensus 77.7%; prior 77.6%)
  • 10:00 ET: December Business Inventories (Briefing.com consensus 0.1%; prior 0.1%)