Bond Market Update

Long Bond Bounces off January Low

• U.S. Treasuries faced some more selling to end a week that saw sharp selling across the curve, though intraday action saw a bounce off lows in the 5-yr note and longer tenors. The trading day started with a continuation of relative weakness in longer tenors after the night brought another tariff retaliation from China. China's tariff on imports from the U.S. will be raised to 125% after President Trump increased the tariff on imports from China to 145%. Meanwhile, China's President Xi is scheduled to visit Vietnam, Malaysia, and Cambodia next week in hopes of discouraging these nations from making deals with the U.S. The first three hours of action saw continued selling even though the PPI report for March showed month-over-month deflation at the headline (-0.4%; Briefing.com consensus 0.1%) and the Core PPI levels (-0.1%; Briefing.com consensus 0.3%) due to a concern that this was only a temporary development. That concern was also expressed in the preliminary reading of the University of Michigan's Consumer Sentiment Index for April (50.8; Briefing.com consensus 54.8), which showed an acceleration in one-year (to 6.7% from 5.0%) and five-year (to 4.4% from 4.1%) inflation expectations. The morning retreat drove the 30-yr yield to within two basis points of its high from January (5.005%), prompting chatter about some form of intervention from the Fed should the weakness continue. However, New York Fed President (FOMC voter) Williams said today that the current modestly restrictive policy stance remains entirely appropriate. The late-morning rally off lows encouraged buying in the stock market, but it could not lift Treasuries into positive territory. The 30-yr bond made a brief appearance in the green before returning to its opening level during the last couple hours of action. This week's underperformance in longer tenors expanded the 2s10s spread by 22 basis points to 54 bps. In commodities, gold rallied strongly to a fresh record near $3250/ozt while WTI crude also advanced to end the week with a loss of about $0.50/bbl. The greenback remained pressured, sending the U.S. Dollar Index lower by 0.7% to 100.14. The Index lost 2.7% this week.
• Yield Check:
  • 2-yr: +10 bps to 3.95% (+28 bps this week)
  • 3-yr: +12 bps to 4.00% (+35 bps this week)
  • 5-yr: +12 bps to 4.16% (+45 bps this week)
  • 10-yr: +10 bps to 4.49% (+50 bps this week)
  • 30-yr: +3 bps to 4.88% (+49 bps this week)

• News:
  • JPMorgan Chase (JPM) beat Q1 expectations by a solid margin. CEO Dimon observed that the economy is facing considerable turbulence, including geopolitics, and acknowledged that asset prices are still rather high.
  • The EU will negotiate the removal of tariffs on imports of Chinese electric vehicles.
  • Philippines Central Bank lowered its policy rate by 25 basis points to 5.50%, as expected.
  • Japan's March M2 Money Stock was up 0.8% yr/yr (expected 1.2%; last 1.2%).
  • India's February Industrial Production rose 2.9% yr/yr (expected 4.0%; last 5.2%) and February Manufacturing Output rose 2.9% m/m (last 5.8%).
  • New Zealand's March Business NZ PMI hit 53.2 (last 54.1).
  • Germany's final March CPI was up 0.3% m/m, as expected (last 0.4%), rising 2.2% yr/yr, as expected (last 2.3%).
  • U.K.'s February GDP was up 0.5% m/m (expected 0.1%; last 0.0%), rising 1.4% yr/yr (expected 0.9%; last 1.2%).
  • Spain's final March CPI was up 0.1% m/m, as expected (last 0.4%), rising 2.3% yr/yr, as expected (last 3.0%).
  • Swiss SECO Consumer Climate fell to -35 from -34 (expected -32).
• Today's Data:
  • The Producer Price Index for final demand decreased 0.4% month-over-month in March (Briefing.com consensus 0.1%) following an upwardly revised 0.1% increase (from 0.0%) in February. The Core Producer Price Index for final demand, which excludes food and energy, decreased 0.1% month-over-month (Briefing.com consensus 0.3%) following an upwardly revised 0.1% increase (from -0.1%) in February. On a year-over-year basis, the index for final demand was up 2.7% versus 3.2% in February, and the index for final demand, less food and energy, was up 3.3% versus 3.5% in February.
    • The key takeaway from the report is that inflation for wholesalers was suppressed in March; however, that good news is being discounted (like yesterday's CPI report was) as temporary given that tariff actions are taking root in supply chains and are expected to lead to higher prices at least in the short term.
  • The preliminary April Univ. of Michigan Index of Consumer Sentiment checked in at 50.8 (Briefing.com consensus 54.8) versus the final reading of 57.0 for March. In the same period a year ago, the index stood at 77.2.
    • The key takeaway from the report is manifold: the decline in consumer sentiment is broad-based; expectations for unemployment to rise are at their highest since 2009; and inflation expectations are surging. This is a terrible mix that will foment concerns about future consumer spending strength.
• Commodities:
  • WTI crude: +2.4% to $61.55/bbl
  • Gold: +2.2% to $3245.90/ozt
  • Copper: +3.7% to $4.51/lb
• Currencies:
  • EUR/USD: +1.2% to 1.1323
  • GBP/USD: +0.8% to 1.3073
  • USD/CNH: -0.4% to 7.2833
  • USD/JPY: -0.5% to 143.75
• The Week Ahead:
  • Monday: Nothing of note
  • Tuesday: April Empire State Manufacturing (Briefing.com consensus -14.8; prior -20.0), March Export Prices (prior 0.1%), Export Prices ex-agriculture (prior 0.1%), Import Prices (prior 0.4%), and Import Prices ex-oil (prior 0.3%) at 8:30 ET
  • Wednesday: Weekly MBA Mortgage Index (prior 20.0%) at 7:00 ET; March Retail Sales (Briefing.com consensus 1.3%; prior 0.2%), Retail Sales ex-auto (Briefing.com consensus 0.2%; prior 0.3%) at 8:30 ET; March Industrial Production (Briefing.com consensus -0.3%; prior 0.7%) and Capacity Utilization (Briefing.com consensus 77.9%; prior 78.2%) at 9:15 ET; February Business Inventories (Briefing.com consensus 0.3%; prior 0.3%) and April NAHB Housing Market Index (Briefing.com consensus 39; prior 39) at 10:00 ET; weekly crude oil inventories (prior +2.55 mln) at 10:30 ET; $13 bln 20-yr Treasury bond reopening results at 13:00 ET; and February Net Long-Term TIC Flows (prior -$45.2 bln) at 16:00 ET
  • Thursday: March Housing Starts (Briefing.com consensus 1.418 mln; prior 1.501 mln), Building Permits (Briefing.com consensus 1.455 mln; prior 1.456 mln), weekly Initial Claims (Briefing.com consensus 225,000; prior 223,000), Continuing Claims (prior 1.850 mln), and April Philadelphia Fed Survey (Briefing.com consensus 10.0; prior 12.5) at 8:30 ET; and weekly natural gas inventories (prior +57 bcf) at 10:30 ET
  • Friday: Bond and equity markets closed for Good Friday