Bond Market Update

Data Recon

• 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.
  • There is no question that the tariff actions upended import activity, which made a major dent in the trade deficit and which will make a materially positive contribution to the net exports component of Q2 GDP. That is good news.
• 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%.
  • That is a bad combination with 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.
  • 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.
• The markets are abuzz with the report that Chinese state media have confirmed that President Trump and President Xi held a phone call, although no details of the call have been provided yet. Treasury yields rose on the report.
• As expected, the ECB voted to cut its key interest rates by 25 basis points.
• Yield check:
  • 2-yr: uncha t 3.88%
  • 3-yr: unch at 3.84%
  • 5-yr: +1 bp to 3.94%
  • 10-yr: unch at 4.36%
  • 30-yr: -2 bps to 4.87%