Bond Market Update

Long End Leads as Tariffs Come to Fruition

• U.S. Treasuries began the week with modest gains in longer tenors while the short end dipped as the market responded to the implementation of tariffs on imports from Canada (25%; 10% on energy), Mexico (25%), and China (10%). Longer tenors displayed relative strength from the start amid an expectation that growth could be impacted while the short end faced some pressure, reflecting a concern about an uptick in inflation. Treasuries climbed off their starting levels during early trade, reaching session highs despite the release of a solid ISM Manufacturing Index for January (50.9%; Briefing.com consensus 49.1%). That move briefly pressured the 10-yr yield past its 50-day moving average (4.479%) to its lowest level since mid-December, but mid-morning trade saw a slide from highs once it was announced that tariffs on imports from Mexico will be suspended for a month after President Trump spoke with Mexico's President Sheinbaum. The rest of the session saw continued backtracking that lifted yields above their opening levels with the 2-yr yield rising back above the 50-day moving average of its own (4.257%). Equities, meanwhile, endured a weak start that was followed by a bounce that erased the bulk of the initial loss in the S&P 500. Crude oil bounced off its 200-day moving average (72.21), moving toward its 200-day moving average (74.76), while the U.S. Dollar Index rose 0.5% to 108.93.
• Yield Check:
  • 2-yr: +3 bps to 4.27%
  • 3-yr: +1 bp to 4.29%
  • 5-yr: -1 bp to 4.36%
  • 10-yr: -3 bps to 4.54%
  • 30-yr: -4 bps to 4.77%

• News:
  • The U.S. Treasury announced that borrowing in the first quarter is expected to reach $815 bln, which is $9 bln below the estimate from October. Borrowing in Q2 is expected to reach $12 bln.
  • President Trump signed an executive order calling for a creation of a sovereign wealth fund over the next year.
  • The Atlanta Fed's GDPNow forecast for Q1 GDP was increased to 3.9% from 2.9% in the previous estimate.
  • European Central Bank policymaker Knot said that the disinflationary process is proceeding "painlessly" with inflation headed for the 2.0% target.
  • French Prime Minister Bayrou could face a no-confidence vote as early as Wednesday as he attempts to push through a budget.
  • Standard & Poor's affirmed Germany's AAA rating with a Stable outlook.
  • China's January Caixin Manufacturing PMI hit 50.1 (expected 50.6; last 50.5).
  • Japan's January Manufacturing PMI hit 48.7 (expected 48.8; last 49.6).
  • South Korea's January trade deficit reached $1.89 bln (expected deficit of $1.28 bln; last surplus of $6.49 bln) as imports fell 6.4% yr/yr (expected -9.9%; last 3.3%) and exports decreased 10.3% yr/yr (expected -13.5%; last 6.6%). December Industrial Production was up 4.6% m/m (expected 0.4%; last -0.7%), rising 5.3% yr/yr (expected 0.7%; last 0.1%). December Retail Sales were down 0.6% m/m (last 0.4%) and December Service Sector Output was up 1.7% m/m (last -0.2%). January Manufacturing PMI hit 50.3 (last 49.0).
  • India's January Manufacturing PMI hit 57.7 (expected 58.0; last 56.4).
  • Hong Kong's December Retail Sales were down 9.7% yr/yr (last -7.3%). Flash Q4 GDP expanded 0.8% qtr/qtr (last -0.1%), growing 2.4% yr/yr (last 1.9%).
  • Australia's January ANZ Job Advertisements were up 0.2% m/m (last 0.3%). December Building Approvals rose 0.7% m/m (expected 0.9%; last -3.4%), increasing 5.6% yr/yr (last 7.1%). December Private House Approvals were down 3.0% m/m (last -1.7%). December Retail Sales dipped 0.1% m/m (expected -0.7%; last 0.8%). January Commodity Prices fell 11.9% yr/yr (last -10.7%).
  • Eurozone's January Manufacturing PMI hit 46.6 (expected 46.1; last 45.1). January CPI was down 0.3% m/m (last 0.4%) but up 2.5% yr/yr (expected 2.4%; last 2.4%). January Core CPI was down 1.0% m/m (last 0.5%) but up 2.7% yr/yr (expected 2.6%; last 2.7%).
  • Germany's January Manufacturing PMI hit 45.0 (expected 44.1; last 42.5).
  • U.K.'s January Manufacturing PMI hit 48.3 (expected 48.2; last 47.0).
  • France's January Manufacturing PMI hit 45.0 (expected 45.3; last 41.9).
  • Italy's January Manufacturing PMI hit 46.3 (expected 46.8; last 46.2). January CPI was up 0.6% m/m (expected 0.4%; last 0.1%), rising 1.5% yr/yr (last 1.3%).
  • Spain's January Manufacturing PMI hit 50.9 (expected 53.5; last 53.3).
  • Swiss January procure.ch Manufacturing PMI hit 47.5 (expected 49.0; last 48.4).
• Today's Data:
  • The S&P Global U.S. Manufacturing PMI hit 51.2 in the final reading for January, up from 50.1 in the preliminary reading and 49.4 in the final December reading.
  • The January ISM Manufacturing Index checked in at 50.9% (Briefing.com consensus 49.1%) versus a downwardly revised 49.2% (from 49.3%) in December. The dividing line between expansion and contraction is 50.0%, so the January reading suggests manufacturing sector activity accelerated versus the prior month and returned to expansion territory.
    • The key takeaway from the report is that manufacturing sector activity overall moved into expansion territory for the first time after 26 straight months of contraction, underscoring an improved demand backdrop seen in the pickup in the new orders and employment indexes.
  • Total construction spending increased 0.5% month-over-month in December (Briefing.com consensus 0.2%) following an upwardly revised 0.2% increase (from 0.0%) in November. Total private construction was up 0.9% month-over-month while total public construction declined 0.5% month-over-month. On a year-over-year basis, total construction spending was up 4.3%.
    • The key takeaway from the report is that new single-family construction activity picked up despite rising interest rates.
• Commodities:
  • WTI crude: +0.9% to $73.12/bbl
  • Gold: +0.8% to $2856.50/ozt
  • Copper: +1.2% to $4.32/lb
• Currencies:
  • EUR/USD: -0.7% to 1.0286
  • GBP/USD: UNCH at 1.2395
  • USD/CNH: +0.1% to 7.3258
  • USD/JPY: -0.2% to 154.83
• The Day Ahead:
  • 10:00 ET: December job openings (prior 8.098 mln) and December Factory Orders (Briefing.com consensus -0.3%; prior -0.4%)