Bond Market Update

Tariff Announcement Fuels Treasury Rally

• U.S. Treasuries of most tenors rallied to fresh highs for the year on Thursday, responding to yesterday's tariff announcement from Washington. The trading day started with sharp gains after an overnight rally alongside other sovereign debt due to worries that the implementation of these tariffs will present a near-term headwind to growth. As for specifics, a 34% tariff will be added on top of the current 20% tariff on imports from China while imports from Japan and Vietnam will be tariffed at 24% and 46%, respectively. Imports from the EU will be hit with a 20% duty while imports from Australia and New Zealand will only be subject to a 10% tariff. The hope is that these measures will force other countries to negotiate, and to that point, Commerce Secretary Lutnick said that discussions were already being held with trading partners today. Treasuries reached their best levels after the release of a disappointing ISM Services report for March (50.8%; Briefing.com consensus 53.2%), followed by a slip from highs as the day went on. Expectations for a June rate cut solidified after today's jump in Treasuries with the fed funds futures market now seeing an 80.0% implied likelihood of a rate cut on June 18, up from 67.3% yesterday. The market is still not expecting a rate cut in May, though the likelihood of that move has increased to 21.7% from yesterday's 10.6%. Crude oil plunged back to $67/bbl while the U.S. Dollar Index fell 1.7% to 102.07, reaching its lowest level since early October.
• Yield Check:
  • 2-yr: -18 bps to 3.72%
  • 3-yr: -20 bps to 3.69%
  • 5-yr: -19 bps to 3.76%
  • 10-yr: -14 bps to 4.06%
  • 30-yr: -7 bps to 4.49%

• News:
  • Fed Vice Chair (FOMC voter) Jefferson said that inflation is easing, but policy must remain balanced to sustain growth.
  • Fitch downgraded China's long-term foreign currency rating to A from A+.
  • China vowed to take "resolute" countermeasures in response while other countries are expected to push for negotiations with Washington.
  • European Central Bank President Lagarde underscored the unpredictability of the current climate while European Commission President von der Leyen said that U.S. tariffs will significantly harm the global economy.
  • China's March Caixin PMI hit 51.9 (expected 51.5; last 51.4).
  • Japan's March Services PMI hit 50.0 (expected 49.5; last 53.7).
  • Hong Kong's March Manufacturing PMI hit 48.3 (last 49.0).
  • Australia's March Services PMI hit 51.6 (expected 51.2; last 50.8). February trade surplus reached AUD2.97 bln (expected surplus of AUD5.38 bln; last surplus of AUD5.16 bln) as imports rose 1.6% m/m (last -0.4%) and exports fell 3.6% m/m (last 0.8%).
  • Eurozone's March Services PMI hit 51.0 (expected 50.4; last 50.6). February PPI was up 0.2% m/m (expected 0.3%; last 0.7%), rising 3.0% yr/yr (last 1.7%).
  • Germany's March Services PMI hit 51.3 (expected 50.2; last 51.1).
  • U.K.'s March Services PMI hit 52.5 (expected 53.2; last 51.0).
  • France's March Services PMI hit 47.9 (expected 46.6; last 45.3).
  • Italy's March Services PMI hit 52.0 (expected 52.6; last 53.0).
  • Spain's March Services PMI hit 54.7 (expected 55.6; last 56.2).
  • Swiss March CPI was unchanged m/m (expected 0.1%; last 0.6%), rising 0.3% yr/yr (expected 0.5%; last 0.3%).
• Today's Data:
  • The ISM Services PMI decreased to 50.8% in March (Briefing.com consensus 53.2%) from 53.5% in February. The dividing line between expansion and contraction is 50.0%, so the March reading reflects services sector activity expanding but at a slower pace than what was seen in the prior month. March marked the 55th time in 58 months that the Services PMI indicated expansion.
    • The key takeaway from the report is that growth in the services sector slowed notably in March with employment contracting for the first time since September.
  • Initial jobless claims for the week ending March 29 decreased by 6,000 to 219,000 (Briefing.com consensus 224,000) from last week's revised reading of 225,000 (from 224,000). Continuing jobless claims for the week ending March 22 increased by 56,000 to 1.903 million from last week's revised rate of 1.847 million (from 1.856 million).
    • The key takeaway from the report is that initial claims remained at a relatively low level while continuing claims increased to their highest level since November 2021, suggesting that people are having an increasingly difficult time returning to work.
  • The February Trade Balance showed a narrowing in the trade deficit to $122.7 billion (Briefing.com consensus -$121.0 billion) from a revised deficit of $130.7 billion (from -$131.4 billion) in January. February imports were $0.1 billion less than January imports while February exports were $8.0 billion more than January exports.
    • The key takeaway from the report is that while there was some sequential narrowing in the trade deficit, the deficit remained in record territory as front-running of purchases continued ahead of April's implementation of tariffs.
  • The S&P Global U.S. Services PMI hit 54.4 in the final reading for March, up from 54.3 in the preliminary reading and February's final reading of 51.0.
  • Weekly natural gas inventories increased by 29 bcf after increasing by 37 bcf a week ago.
• Commodities:
  • WTI crude: -6.5% to $67.03/bbl
  • Gold: -1.4% to $3121.90/ozt
  • Copper: -4.4% to $4.83/lb
• Currencies:
  • EUR/USD: +1.9% to 1.1035
  • GBP/USD: +0.7% to 1.3093
  • USD/CNH: -0.6% to 7.2775
  • USD/JPY: -1.5% to 146.42
• The Day Ahead:
  • 8:30 ET: March Nonfarm Payrolls (Briefing.com consensus 130,000; prior 151,000), Nonfarm Private Payrolls (Briefing.com consensus 120,000; prior 140,000), Average Hourly Earnings (Briefing.com consensus 0.3%; prior 0.3%), Unemployment Rate (Briefing.com consensus 4.1%; prior 4.1%), and Average Workweek (Briefing.com consensus 34.2; prior 34.1)