Bond Market Update

Inflation Jitters Weigh

• U.S. Treasuries retreated on Friday, sending the 2-yr note into negative territory for the week while the 5-yr note and longer tenors trimmed this week's gains. The trading day started in flat fashion after a night that was quiet on the economic front. The Reserve Bank of India announced a 25-basis point rate cut, but that was expected. The flat start was followed by a volatile response to the January Employment Situation report, which showed below-consensus nonfarm payroll growth (143,000; Briefing.com consensus 155,000) coupled with significant upward revisions to readings from December and November and an above-consensus increase in average hourly earnings (0.5%; Briefing.com consensus 0.3%). Treasuries briefly turned positive in reaction to the report before finding resistance near Wednesday's highs and reversing sharply into the red. The market received another negative signal regarding inflation when the preliminary reading of the University of Michigan's Consumer Sentiment Index for February showed an increase in year-ahead inflation expectations to 4.3% from 3.3%. Treasuries reached lows just before 11:00 ET, spending the rest of the session in a sideways drift above their lows. Today's selling lifted yields back above their respective 50-day moving averages with the 2-yr yield turning higher for the week. This week's underperformance up front tightened the 2s10s spread by twelve basis points to 21 bps. Crude oil narrowed this week's loss to $1.51, or 2.1%, while the U.S. Dollar Index reclaimed its 50-day moving average (107.84), rising 0.3% to 108.05. The Index lost 0.4% this week.
• Yield Check:
  • 2-yr: +7 bps to 4.28% (+4 bps this week)
  • 3-yr: +7 bps to 4.30% (+2 bps this week)
  • 5-yr: +6 bps to 4.33% (-3 bps this week)
  • 10-yr: +5 bps to 4.49% (-8 bps this week)
  • 30-yr: +4 bps to 4.69% (-12 bps this week)

• News:
  • Fed Governor (FOMC voter) Kugler said that the U.S. economy remains on a firm footing.
  • The Reserve Bank of India lowered its policy rate by 25 basis points to 6.25%, as expected.
  • President Trump and Japan's Prime Minister Ishiba said that Nippon Steel will not acquire U.S. Steel (X), but it will make an investment in the company.
  • FT speculated that a reform of Germany's debt brake laws could introduce some volatility into the bond market.
  • Japan's December Household Spending rose 2.3% m/m (expected -0.5%; last 0.4%), increasing 2.7% yr/yr (expected 0.2%; last -0.4%). December Leading Index rose to 108.9 from 107.5 (expected 108.2) and Coincident Indicator was up 1.4% m/m (last -1.4%).
  • Germany's December trade surplus reached EUR20.7 bln (expected surplus of EUR17.0 bln; last surplus of EUR19.2 bln) as imports rose 2.1% m/m (expected 1.8%; last -2.7%) and exports increased 2.9% m/m (expected -0.6%; last 2.3%). December Industrial Production fell 2.4% m/m (expected -0.7%; last 1.3%), dropping 3.1% yr/yr (last -3.0%).
  • U.K.'s January Halifax House Price Index was up 0.7% m/m (expected 0.4%; last -0.2%), rising 3.0% yr/yr (last 3.4%).
  • France's December trade deficit reached EUR3.9 bln (expected deficit of EUR5.3 bln; last deficit of EUR6.3 bln) and December Current Account surplus reached EUR2.4 bln (last deficit of EUR1.2 bln). Q4 Nonfarm Payrolls fell 0.2% qtr/qtr (expected -0.1%; last 0.1%).
  • Spain's December Industrial Production rose 2.1% yr/yr (expected 0.5%; last -0.1%).
  • Swiss Q1 SECO Consumer Climate improved to -21 from -27 (expected -31).
• Today's Data:
  • January nonfarm payrolls increased by 143,000 (Briefing.com consensus 155,000). The 3-month average for total nonfarm payrolls increased to 237,000 from 204,000. December nonfarm payrolls revised to 307,000 from 256,000. November nonfarm payrolls revised to 261,000 from 212,000.
    • January private sector payrolls increased by 111,000 (Briefing.com consensus 163,000). December private sector payrolls revised to 273,000 from 223,000. November private sector payrolls revised to 244,000 from 182,000.
    • January unemployment rate was 4.0% (Briefing.com consensus 4.1%), versus 4.1% in December. Persons Unemployed for 27 weeks or more accounted for 21.1% of the unemployed versus 22.4% in December. The U6 unemployment rate, which accounts for unemployed and underemployed workers, held steady at 7.5%.
    • January average hourly earnings were up 0.5% (Briefing.com consensus 0.3%) versus 0.3% in December. Over the last 12 months, average hourly earnings have risen 4.1%, versus an upwardly revised 4.1% (from 3.9%) for the 12 months ending in December.
    • The average workweek in January was 34.1 hours (Briefing.com consensus 34.3), versus a revised 34.2 hours (from 34.3) in December. Manufacturing workweek was little changed at 40.0 hours. Factory overtime was unchanged at 2.8 hours.
    • The labor force participation rate increased to 62.6% from 62.5% while the employment-population ratio increased to 60.1% from 60.0%.
  • The preliminary University of Michigan Index of Consumer Sentiment for February dropped to 67.8 (Briefing.com consensus 71.3) from the final reading of 71.1 for January. In the same period a year ago, the index stood at 76.9.
    • The key takeaway from the report is that the weakening in sentiment was described as "pervasive" across political, age, and wealth groups, underscoring the worrisome impact of higher inflation expectations.
  • Wholesale Inventories decreased by 0.5% in December (Briefing.com consensus -0.5%) after decreasing 0.2% in November.
  • Consumer credit increased a whopping $40.8 billion in December (Briefing.com consensus $13.4 billion) after declining by an upwardly revised $5.4 billion (from $7.5 billion) in November. December saw the largest increase in consumer credit since June 2021.
    • The key takeaway from the report is that there was healthy demand for consumer credit in December despite relatively high interest rates.
• Commodities:
  • WTI crude: +0.7% to $70.95/bbl
  • Gold: +0.4% to $2887.10/ozt
  • Copper: +3.4% to $4.60/lb
• Currencies:
  • EUR/USD: -0.5% to 1.0336
  • GBP/USD: -0.1% to 1.2414
  • USD/CNH: +0.2% to 7.3022
  • USD/JPY: -0.1% to 151.27
• The Week Ahead:
  • Monday: Nothing of note
  • Tuesday: $58 bln 3-yr Treasury note auction results at 13:00 ET
  • Wednesday: Weekly MBA Mortgage Index (prior 2.2%) at 7:00 ET; January CPI (prior 0.4%), and January Core CPI (prior 0.2%) at 8:30 ET; weekly crude oil inventories (prior +8.66 mln) at 10:30 ET; $42 bln 10-yr Treasury note auction results at 13:00 ET; and January Treasury Budget (prior -$87.0 bln) at 14:00 ET
  • Thursday: January PPI (prior 0.2%), January Core PPI (prior 0.0%), weekly Initial Claims (prior 219,000), and Continuing Claims (prior 1.886 mln) at 8:30 ET; weekly natural gas inventories (prior -174 bcf) at 10:30 ET; and $25 bln 30-yr Treasury bond auction results at 13:00 ET
  • Friday: January Retail Sales (prior 0.4%), Retail Sales ex-auto (prior 0.4%), and January Import/Export Prices at 8:30 ET; January Industrial Production (prior 0.9%) and Capacity Utilization (prior 77.6%) at 9:15 ET; and December Business Inventories (prior 0.1%) at 10:00 ET