Bond Market Update

Boosted by Slowing Inflation Expectations

• U.S. Treasuries had a positive start to the week with the 2-yr note displaying relative strength throughout the day while the long bond opened in the red but eventually recovered its opening loss. Shorter tenors outperformed from the start after the overnight session brought the release of more deflationary CPI and PPI readings from China and its trade balance report, which showed a 34.4% drop in exports to the U.S. Treasuries bounced around their starting levels through the first couple hours of trade, with the 30-yr bond slipping toward last week's high before finding support. Mid-morning action saw a rebound off lows that continued into the afternoon with help from the May Survey of Consumer Expectations from the New York Fed. That survey showed a drop in year-ahead inflation expectations to 3.2% from 3.6% in April. The three-year outlook decreased to 3.0% from 3.2% while the five-year outlook dipped to 2.6% from 2.7%. The day went by without market-moving updates from trade talks between officials from the U.S. and China, but Fox Business reported that the talks will continue tomorrow. Crude oil reached its best pit close since early April while the U.S. Dollar Index fell 0.2% to 98.95.
• Yield Check:
  • 2-yr: -4 bps to 4.00%
  • 3-yr: -5 bps to 3.98%
  • 5-yr: -4 bps to 4.09%
  • 10-yr: -3 bps to 4.48%
  • 30-yr: -1 bp to 4.95%

• News:
  • The Atlanta Fed's GDPNow forecast for Q2 GDP was left unrevised at 3.8% in the latest update.
  • Japan still isn't satisfied with the U.S.'s position in trade negotiations, but progress is being made, according to lead negotiator Ryosei Akazawa.
  • There was growing speculation that the European Central Bank has reached the end of its rate cut cycle.
  • China's May CPI was down 0.2% m/m (last 0.1%) and down 0.1% yr/yr (expected -0.2%; last -0.1%); May PPI was down 3.3% yr/yr (expected -3.1%; last -2.7%). May Trade Surplus reached CNY743.56B (expected CNY710.0B; last CNY689.99B) or $103.022B (expected $101.1B; last $96.18B) as exports rose 4.8% yr/yr (expected 5.0%; last 8.1%) and imports fell 3.4% yr/yr (expected -0.9%; last -0.2%).
  • Japan's Q1 GDP was unchanged qtr/qtr (expected -0.2%; last 0.6%); GDP Price Index rose 3.3% (expected 3.2%; last 2.9%); May Bank Lending was up 2.4% yr/yr (expected 2.3%; last 2.3%); May Economy Watchers Current Index rose to 44.4 from 42.6 (expected 43.8).
• Today's Data:
  • Wholesale Inventories were up 0.2% month-over-month in April (Briefing.com consensus 0.0%) after a 0.4% increase in March.
• Commodities:
  • WTI crude: +1.1% to $65.29/bbl
  • Gold: +0.3% to $3354.70/ozt
  • Copper: +1.4% to $4.92/lb
• Currencies:
  • EUR/USD: +0.3% to 1.1429
  • GBP/USD: +0.3% to 1.3565
  • USD/CNH: -0.1% to 7.1817
  • USD/JPY: -0.2% to 144.52
• The Day Ahead:
  • 6:00 ET: May NFIB Small Business Optimism (prior 95.8)
• Treasury Auctions:
  • 13:00 ET: $58 bln 3-yr Treasury note auction results