Bond Market Update

Cool May CPI Fuels Intraday Reversal

• U.S. Treasuries climbed on Wednesday, benefitting from the CPI report for May, which was cooler than expected at the headline (0.1%; Briefing.com consensus 0.2%) and core (0.1%; Briefing.com consensus 0.3%) levels. The trading day started with modest losses across the curve after the conclusion of the two-day meeting in London between officials from the U.S. and China. The outcome was somewhat underwhelming, considering the two sides simply agreed to implement what was already agreed upon during a mid-May meeting in Switzerland. President Trump added this morning that China will supply rare earth elements to the U.S. up front, though the agreement is still yet to be approved by China's President Xi. Treasuries recovered their opening losses in immediate reaction to the CPI report, sending the 5-yr yield back below its 200-day moving average (4.049%) toward its 50-day moving average (3.982%). Intraday action saw some light backtracking, but the entire complex climbed to fresh highs after the U.S. Treasury followed yesterday's soft 3-yr note sale with a solid 10-yr note reopening ahead of tomorrow's 30-yr bond reopening. Crude oil soared to its best level since early April with its 200-day moving average (68.74) looming above, assisted by a bullish inventory report from the EIA and an AP report that the U.S. government will tell all nonessential personnel to evacuate the U.S. Embassy in Baghdad. The U.S. Dollar Index fell 0.5% to 98.62.
• Yield Check:
  • 2-yr: -7 bps to 3.94%
  • 3-yr: -8 bps to 3.91%
  • 5-yr: -8 bps to 4.01%
  • 10-yr: -6 bps to 4.41%
  • 30-yr: -3 bps to 4.91%

• News:
  • Republicans are expected to scale back cuts to food stamps and will no longer call for Medicare changes in the reconciliation bill, according to Politico.
  • The U.S. and India might be on track to announce an interim trade deal by the end of the month, according to Reuters.
  • British Chancellor Reeves is unveiling a three-year spending plan today for the U.K., according to Bloomberg.
  • European Central Bank policymaker Kazaks spoke in favor of more rate cuts.
  • Japan's May PPI was down 0.2% m/m (last 0.3%) and up 3.2% yr/yr (expected 3.5%; last 4.1%).
  • South Korea's May Unemployment Rate remained at 2.7%.
• Today's Data:
  • Total CPI was up 0.1% month-over-month in May (Briefing.com consensus 0.2%) after increasing 0.2% in April. Core CPI, which excludes food and energy, was up 0.1% month-over-month (Briefing.com consensus 0.3%) after increasing 0.2% in April. On a year-over-year basis, total CPI was up 2.4%, versus 2.3% in April. Core CPI was up 2.8% year-over-year, versus 2.8% in April.
    • The key takeaway from the report is that both headline and core CPI were lower than expected on a month-over-month basis. While these readings may not give a big boost to near-term rate cut expectations, they should also not cause the market to think that the next cut will be delayed.
  • The Treasury Budget for May showed a deficit of $316.0 billion compared to a deficit of $347.1 billion in the same period a year ago. The May deficit resulted from outlays ($687.2 billion) exceeding receipts ($371.2 billion). The Treasury Budget data are not seasonally adjusted so the May deficit cannot be compared to the April surplus of $258.4 billion.
    • The key takeaway from the report is that the year-to-date deficit is still up a sizable 13.6% year-over-year, though it is down from 22.0% in April, 23.0% in March, and 38.5% in February.
  • Weekly crude oil inventories decreased by 3.64 mln barrels after decreasing by 4.30 mln barrels a week ago.
  • $39 bln 10-year Treasury note reopening results (prior 12-auction average):
    • High yield: 4.421% (4.316%).
    • Bid-to-cover: 2.52 (2.57).
    • Indirect bid: 70.6% (70.1%).
    • Direct bid: 20.5% (17.0%).
• Commodities:
  • WTI crude: +5.0% to $68.21/bbl
  • Gold: UNCH at $3344.20/ozt
  • Copper: -1.6% to $4.82/lb
• Currencies:
  • EUR/USD: +0.5% to 1.1484
  • GBP/USD: +0.4% to 1.3543
  • USD/CNH: +0.1% to 7.1966 
  • USD/JPY: -0.2% to 144.50
• The Day Ahead:
  • 8:30 ET: May PPI (Briefing.com consensus 0.2%; prior -0.5%), Core PPI (Briefing.com consensus 0.3%: prior -0.4%), weekly Initial Claims (Briefing.com consensus 250,000; prior 247,000), and Continuing Claims (prior 1.904 mln)
  • 10:30 ET: Weekly natural gas inventories (prior +122 bcf)