Bond Market Update

Three-Day Skid Snapped

• U.S. Treasuries rallied on Thursday, bouncing strongly from three days of losses with help from a cool PPI report for April (-0.5%; Briefing.com consensus 0.3%). The trading day started with modest gains after an overnight torrent of news and economic reports, which included some more trade-related developments, an indication that Iran is willing to sign a nuclear deal in exchange for sanction relief, and an above-consensus Q1 GDP report from the U.K. (0.7%; expected 0.6%). The market saw some volatility in immediate reaction to today's first batch of data before embarking on a steady rise. That batch included the aforementioned PPI report, no change in weekly jobless claims (229,000), and below-consensus Retail Sales for April (0.1%; Briefing.com consensus 0.2%). Treasuries continued rising into the early afternoon, staying just below their highs into the close. Crude oil fell toward $61.50/bbl amid the report about a potential nuclear deal with Iran while the U.S. Dollar Index slipped 0.2% to 100.87.
• Yield Check:
  • 2-yr: -8 bps to 3.97%
  • 3-yr: -9 bps to 3.96%
  • 5-yr: -9 bps to 4.07%
  • 10-yr: -7 bps to 4.46%
  • 30-yr: -5 bps to 4.92%

• News:
  • The Atlanta Fed's GDPNow forecast for Q2 GDP was revised up to 2.5% from 2.3% in the previous estimate.
  • The U.S. will loosen bank capital rules related to the Supplemental Leverage Ratio, according to FT.
  • President Trump said that India offered to remove all tariffs on goods from the United States, according to Bloomberg.
  • Banxico lowered its policy rate by 50 basis points to 8.50%, as expected.
  • Japan may agree to re-import vehicles made in the United States into Japan.
  • The official cost of the reconciliation bill is expected to be between $2.5 and $3.3 trln over a decade, according to The Washington Post.
  • European Central Bank Vice President de Guindos warned that escalating trade tensions could lead to a trade war with "significant negative consequences for global growth, inflation and asset prices."
  • China Securities Journal noted that analysts see room for more reserve requirement ratio cuts by the end of the year.
  • Japan's trade negotiator Akazawa will visit Washington for trade talks next week.
  • Officials from South Korea and the U.S. reportedly discussed foreign exchange policy during a meeting on May 5.
  • Japan's April Machine Tool Orders grew 7.7% yr/yr (last 11.4%).
  • South Korea's April trade surplus reached $4.88 bln, as expected (last surplus of $4.92 bln) as imports fell 2.7% yr/yr, as expected (last 2.3%) and exports rose 3.7% yr/yr, as expected (last 3.0%).
  • Australia's April employment increased by 89,000 (expected 20,900; last 36,400) and full employment increased by 59,500 (last 12,200). April Unemployment Rate remained at 4.1%, as expected, and April Participation Rate rose to 67.1% from 66.8% (expected 66.8%). April MI Inflation Expectations slowed to 4.1% from 4.2%.
  • New Zealand's April FPI was up 0.8% m/m (last 0.5%).
  • Eurozone's Q1 GDP expanded 0.3% qtr/qtr (expected 0.4%; last 0.2%), growing 1.2% yr/yr, as expected (last 1.2%). Q1 employment increased by 0.3% qtr/qtr (expected 0.1%; last 0.1%), rising 0.6% yr/yr (expected 0.8%; last 0.7%). March Industrial Production was up 2.6% m/m (expected 1.9%; last 1.1%), rising 3.6% yr/yr (expected 2.5%; last 1.0%).
  • Germany's April WPI was down 0.1% m/m (expected +0.2%; last -0.2%), but up 0.8% yr/yr (last +1.3%).
  • U.K.'s Q1 GDP was up 0.7% qtr/qtr (expected +0.6%; last +0.1%), growing 1.3% yr/yr (expected +1.2%; last +1.5%).
  • France's April CPI was up 0.6% m/m (expected +0.5%; last +0.2%), rising 0.8% yr/yr (expected +0.8%; last +0.8%).
  • Swiss April PPI was up 0.1% m/m (expected +0.2%; last +0.1%) but was down 0.5% yr/yr (last -0.1%).
• Today's Data:
  • The Producer Price Index for final demand decreased 0.5% month-over month in April (Briefing.com consensus 0.3%). That was the good news. The bad news is that the prior month was revised up to unchanged from a 0.4% decline. The Producer Price Index for final demand, less foods and energy, decreased 0.4% month-over-month (Briefing.com consensus 0.3%), again good news, but the bad news (again) is that the prior month was revised up to 0.4% from -0.1%. On a year-over-year basis, the index for final demand was up 2.4%, versus an upwardly revised 3.4% (from 2.7%) in March, while the index for final demand, less foods and energy, was up 3.1%, versus an upwardly revised 4.0% (from 3.3%) in March.
    • The key takeaway from the report is that the big drop in the index for final demand was driven by a 0.7% decline in the index for final demand services (the largest decline since December 2009). Over 40% of that 0.7% decline was driven by margins for machinery and vehicle wholesaling, which dropped 6.1%. That suggests wholesalers were likely absorbing some tariff impacts, which is good for the end customer but not necessarily for earnings.
  • Total retail sales increased 0.1% month-over-month in April (Briefing.com consensus 0.2%) following an upwardly revised 1.7% (from 1.4%) in March. Excluding autos, retail sales were also up 0.1% month-over-month (Briefing.com consensus 0.5%) following an upwardly revised 0.8% increase (from 0.5%) in March.
    • The key takeaway from the report is that the pace of spending on goods decelerated in April, speaking to the tariff frontrunning evident in the strong sales for March and reflecting the consumer's cautious mindset following "Liberation Day" and the stock market's volatility.
  • Initial jobless claims for the week ending May 10 were unchanged at 229,000 (Briefing.com consensus 226,000), while continuing jobless claims for the week ending May 3 increased by 9,000 to 1.881 million.
    • The key takeaway from the report is that the initial jobless claims filings -- a leading indicator -- still reflect an otherwise solid labor market that will remain supportive of consumer spending, albeit perhaps at a slower pace in the face of higher prices.
  • The May Empire State Manufacturing Index checked in at -9.2 (Briefing.com consensus 1.0) versus -8.1 in April. The May Philadelphia Fed Index checked in at -4.0 (Briefing.com consensus -6.0) versus -26.4 in March.
    • The key takeaway from these regional manufacturing reports is that the breakeven point between contraction and expansion is 0.0, so each reflects a contraction in activity in May versus April, somewhat faster for the Empire State report and somewhat slower for the Philadelphia Fed Index.
  • Total industrial production was flat month-over-month in April (Briefing.com consensus 0.3%) following an unrevised 0.3% decline in March. The capacity utilization rate dipped to 77.7% (Briefing.com consensus 77.9%) from an unrevised 77.8% in March. Total industrial production increased 1.5% yr/yr while the capacity utilization rate was 1.9 percentage points below its long-run average.
    • The key takeaway from the report is that manufacturing output was weak. Excluding motor vehicles and parts, manufacturing output still decreased 0.3%, presumably with the tariff uncertainty holding back total output.
  • Weekly natural gas inventories increased by 110 bcf after increasing by 104 bcf a week ago.
• Commodities:
  • WTI crude: -2.3% to $61.67/bbl
  • Gold: +1.1% to $3.223.50/ozt 
  • Copper: +0.9% to $4.69/lb
• Currencies:
  • EUR/USD: UNCH at 1.1174
  • GBP/USD: +0.3% to 1.3296
  • USD/CNH: -0.1% to 7.2045
  • USD/JPY: -0.6% to 145.68
• The Day Ahead:
  • 8:30 ET: April Housing Starts (Briefing.com consensus 1.383 mln; prior 1.324 mln) and Building Permits (Briefing.com consensus 1.450 mln; prior 1.481 mln), April Import Prices (prior -0.1%), Import Prices ex-oil (prior 0.1%), Export Prices (prior 0.0%), and Export Prices ex-agriculture (prior -0.1%)
  • 10:00 ET: Preliminary May University of Michigan Consumer Sentiment (Briefing.com consensus 55.0; prior 52.2)
  • 16:00 ET: March net Long-Term TIC Flows (prior $112.0 bln)