Bond Market Update

Stirred by Growth Concerns

• U.S. Treasuries saw a relatively uneventful overnight trade, yet the trade throughout the cash session was anything but uneventful. Treasuries went into rally mode following the release of a weaker-than-expected ADP Employment Change Report for May and gained some added traction after the ISM Services PMI for May registered a contractionary reading (49.9%) for only the fourth time in the last 60 months. That combination stirred growth concerns that underpinned securities across the curve and a buzz in the market about the Fed seeing a rationale to cut the fed funds rate by at least 25 basis points no later than the September FOMC meeting. The dollar got clipped by the growth worries and downturn in interest rates. The U.S. Dollar Index was down 0.4% to 98.80.
• Yield Check:
  • 2-yr: -8 bps to 3.88%
  • 3-yr: -8 bps to 3.84%
  • 5-yr: -9 bps to 3.93%
  • 10-yr: -10 bps to 4.36%
  • 30-yr: -9 bps to 4.89%

• News:
  • President Trump acknowledges that President Xi is "very tough and extremely hard to make a deal with," according to Bloomberg
  • Steel and aluminum tariff hike to 50%, effective today; UK exempt for five-weeks, according to Bloomberg
  • Senate Leader Thune suggests SALT deduction cap in House bill will need to change, according to Bloomberg
  • President Trump, in Truth Social post, says he thinks the debt limit should be "entirely scrapped"
  • Fed's Beige Book says reports across 12 Federal Reserve Districts indicate that economic activity has declined slightly since last report
  • Rising cost for hedging currency risk reduces appeal of owning Treasuries for foreign investors, according to The Wall Street Journal
  • Automakers express concerns about production disruption due to China's export restrictions, according to Reuters
  • China Securities Journal reported that the People's Bank of China is fine-tuning liquidity levels to meet mid-year needs
  • Germany's government approved a EUR46 bln corporate tax relief plan
  • MBA Mortgage Applications Index -3.9% wk/wk, with refinance applications down 4% and purchase applications down 4%
  • Japan's May Services PMI 51.0 (expected 50.8; last 52.4)
  • Eurozone's May Services PMI 49.7 (expected 48.9; last 50.1)
• Today's data:
  • The ISM Services PMI fell to 49.9% in May (Briefing.com consensus 52.0%) from 51.6% in April. The dividing line between expansion and contraction is 50.0%, so the May reading reflects services sector activity pivoting to contraction from growth in the prior month. This is only the fourth time in the last 60 months that the Services PMI has been below 50.0%.
    • The key takeaway from the report is that it signaled a worrying mix of a contraction in growth for the largest economic sector and a continued increase in prices. That will be interpreted as a stagflation report (even though the employment index tipped back into an expansion mode). In any case, the overarching message of the report is that growth has slowed amid all the tariff uncertainty.
  • ADP said private sector employment increased by 37,000 in May (Briefing.com consensus 115,000) following a downwardly revised 60,000 (from 62,000) in April. The goods-producing sector saw a loss of 2,000 jobs, while the service-providing sector saw an increase of 36,000. Mid-sized firms added 49,000 jobs, but small firms shed 13,000 jobs, and large firms saw a loss of 3,000 jobs.
• Commodities:
  • WTI crude: -0.9% to $62.87/bbl
  • Gold: +0.7% to $3399.60/ozt
  • Copper: +1.2% to $4.89/lb
• Currencies:
  • EUR/USD: +0.4% to 1.1419
  • GBP/USD: +0.3% to 1.3555
  • USD/CNH: -0.3% to 7.1708
  • USD/JPY: -0.8% to 142.82
• The Day Ahead:
  • 08:30 ET: Initial Jobless Claims (Briefing.com consensus 235K; prior 240K) and Continuing Jobless Claims (prior 1919K)
  • 08:30 ET: April Trade Balance (Briefing.com consensus -$117.2B; prior -$140.5B)
  • 08:30 ET: Q1 Productivity - Rev (Briefing.com consensus -0.8%; prior -0.8%) and Unit Labor Costs - Rev (Briefing.com consensus 5.7%; prior 5.7%)
  • 10:30 ET: EIA Natural Gas Inventories (prior +101 bcf)
  • 12:00 ET: Fed Governor Kugler (FOMC voter)
  • 13:30 ET: Fed Governor Harker (non-FOMC voter)