Bond Market Update

Treasuries pivot as news hits

• U.S. Treasuries enjoyed a modest bid in overnight trading, but that bid largely disappeared in the cash trade following this morning's economic data that included a 6.6% increase in Q1 unit labor costs and a plunge in the April trade deficit that will provide a big boost to Q2 GDP forecasts, and a confirmation that President Trump and President Xi held a phone call and agreed to have their respective teams meet again soon. The trade also occurred against a backdrop of concerns about the path of the reconciliation bill, as some senators voiced objections to the House's version of the bill and Elon Musk said bluntly, "kill the bill," drawing the ire of President Trump. Separately, the ECB cut its key interest rates by 25 basis points, as expected, but that news was overshadowed by the aforementioned developments. The U.S. Dollar Index was flat at 98.78.
• Yield Check:
  • 2-yr: +5 bps to 3.93%
  • 3-yr: +6 bps to 3.90%
  • 5-yr: +6 bps to 3.99%
  • 10-yr: +3 bps to 4.39%
  • 30-yr: -1 bp to 4.88%

• News:
  • Elon Musk continues to denounce the one, big beautiful bill, saying on X, "Kill the bill," according to Politico
  • President Trump says, 'The easiest way to save money in our Budget, Billions and Billions of Dollars, is to terminate Elon’s Governmental Subsidies and Contracts'
  • President Trump and President Xi hold phone call and indicate their respective teams will meet agin soon
  • Big differences between Senate and White House threaten the president's July 4 deadline for getting bill done, according to Punchbowl News
  • President Trump signs travel ban for 12 countries, according to Bloomberg
  • President Trump, citing national security concerns, announces restrictions on entry for foreign nationals studying at Harvard, according to White House
  • Prime Minister Carney and President Trump hold secret trade and security talks aiming for bilateral deal by Fall, according to Globe and Mail
  • China's restrictions on exports of rare earth minerals threatens auto production, according to Reuters
  • Aluminum industry executives express concerns about demand destruction following tariff rate increase, according to Bloomberg
  • Senate confirms Fed Governor Bowman as Vice Chair for Supervision, according to Reuters
  • ECB expected to cut its deposit rate by 25 basis points today to 2%, according to Bloomberg
  • Fed Governor Kugler (FOMC voter) sees tariff-driven inflation risks rising, supports holding rates steady
  • Kansas City Fed President Schmid (FOMC voter) emphasizes support for community banks, calls for balanced regulation; Fed focused on stability, growth, and understanding regional banking needs
  • Philadelphia Fed President Patrick Harker (not a voting FOMC member) delivers final economic outlook, emphasizes Fed's deliberate approach amid uncertainty
  • Japan's 30-yr bond auction not good, but better than feared, according to Bloomberg
  • China's May Caixin Services PMI 51.1 (expected 51.0; last 50.7)
• Today's Data:
  • Q1 productivity decreased 1.5% (Briefing.com consensus -0.8%) versus the preliminary report of a 0.8% decrease. Unit labor costs, meanwhile, were revised up to 6.6% (Briefing.com consensus 5.7%) from the preliminary reading of 5.7%.
    • Briefing.com Analyst Insight: The combination of declining productivity and the big jump in unit labor costs has stagflation undertones that will complicate the Fed's assessment of the overall economic picture and what to do with its policy rate.
  • Initial jobless claims for the week ending May 31 increased by 8,000 to 247,000. Continuing jobless claims for the week ending May 24 decreased by 3,000 to 1.904 million; however, the four-week moving average of 1,895,250 is the highest level since November 27, 2021.
    • Briefing.com Analyst Insight: These data point to some softening in the labor market but altogether don't ring any loud alarm bells for the economic outlook. Yes, initial jobless claims -- a leading indicator -- have risen, but they remain well below levels associated with a recession. It won't be until the initial claims numbers start to exceed 300,000 on a regular basis that alarms will sound with respect to the labor market and the economy's growth trajectory.
  • One thing that became crystal clear this morning is that the trade deficit plunged in April to $61.6 billion (Briefing.com consensus -$117.2 billion) from an upwardly revised deficit of $138.3 billion (from -$140.5 billion) in March. Exports were $8.3 billion more than March exports, but imports were $68.4 billion less than March imports.
    • Briefing.com Analyst Insight: Bear in mind that the March trade deficit was at a record level, driven by a surge in imports that was a function of frontrunning the tariffs. With the April report, there is little question that the tariff actions upended import activity. The result is that there was a major dent made in the trade deficit, which President Trump will enjoy seeing. Another takeaway is that the plunge in imports will result in the net exports component making a materially positive contribution to Q2 GDP and economists raising their Q2 GDP forecasts.
• Commodities:
  • WTI crude: +0.8% to $63.37/bbl
  • Gold: -0.7% to $3375.20/ozt
  • Copper: +0.8% to $4.93/lb
• Currencies:
  • EUR/USD: +0.2% to 1.1438
  • GBP/USD: flat at 1.3573
  • USD/CNH: +0.1% to 7.1754
  • USD/JPY: +0.7% to 143.69
• The Day Ahead:
  • 08:30 ET: May nonfarm payrolls (Briefing.com consensus 130K; prior 177K)
  • 08:30 ET: May nonfarm private payrolls (Briefing.com consensus 123K; prior 167K)
  • 08:30 ET: May unemployment rate (Briefing.com consensus 4.2%; prior 4.2%)
  • 08:30 ET: May avg. hourly earnings (Briefing.com consensus 0.3%; prior 0.2%)
  • 08:30 ET: May avg. workweek (Briefing.com consensus 34.3; prior 34.3)
  • 15:00 ET: April Consumer Credit (Briefing.com consensus $10.3B; prior $10.2B)