Bond Market Update

Treasuries Offer Safe Harbor Amid Metals Storm

• U.S. Treasuries finished January in mixed fashion with 5s and shorter tenors recording gains while longer tenors lagged, ending with slim losses. Intraday action unfolded inside a fairly narrow range, which masked historical volatility in precious metals and a sloppy showing from some pockets of the equity market that had shown strength earlier this month. The Friday session followed a night that was jam-packed with economic reports, including eurozone's above-consensus GDP reading for Q4 (0.3%; expected 0.2%) and news that President Trump nominated Kevin Warsh to succeed Jay Powell at the helm of the Federal Reserve. Longer tenors underperformed from the start with the entire complex facing some pressure after receiving a hotter-than expected PPI report for December (0.5%; Briefing.com consensus 0.2%), which kept the year-over-year headline growth rate at 3.0% while Core PPI (0.7%; Briefing.com consensus 0.3%) accelerated to 3.3% year-over-year from 3.1% in November. The post-data pressure briefly lifted the 30-yr yield back to this week's high, where the market found support once again. The rebound saw an extension to fresh highs in the early afternoon as weakness in equities persisted while precious metals finished the pit session on lows but climbed in subsequent electronic trade. Today's outperformance in the 2-yr note built on this week's gain, resulting in a modestly lower finish for the month while the 10-yr note ended the week unchanged, recording a loss for January. Crude oil extended its January gain to $7.57/bbl or 13.1%, while the U.S. Dollar Index rose 0.8% to 97.01, narrowing this month's loss to 1.3%.
• Yield Check:
  • 2-yr: -2 bps to 3.53% (-7 bps this week; +5 bps in January)
  • 3-yr: -2 bps to 3.60% (-7 bps this week; +6 bps in January)
  • 5-yr: -1 bp to 3.80% (-4 bps this week; +7 bps in January)
  • 10-yr: +1 bp to 4.24% (UNCH this week; +7 bps in January)
  • 30-yr: +2 bps to 4.87% (+4 bps this week; +2 bps in January)

• News:
  • The Senate reached a deal to keep the government open, but a brief shutdown will still take place over the weekend since the House will not vote until Monday.
  • Fitch affirmed South Korea's AA- rating with a Stable outlook.
  • The CEO of Indonesia's IDX exchange resigned after this week's volatility that followed MSCI's flagging of Indonesia's stocks for a potential downgrade.
  • Japan's January Tokyo CPI was up 1.5% yr/yr (last 2.0%) and January Tokyo Core CPI was up 2.0% yr/yr (expected 2.2%; last 2.3%). December Retail Sales fell 0.9% yr/yr (expected 0.7%; last 1.1%) and December Industrial Production dipped 0.1% m/m (expected -0.4%; last -2.7%). December jobs/applications ratio rose to 1.19 from 1.18 (expected 1.18) and December Unemployment Rate remained at 2.6%, as expected. December Housing Starts decreased 1.3% yr/yr (expected -4.5%; last -8.5%) and Construction Orders jumped 20.2% yr/yr (last 9.5%).
  • South Korea's December Retail Sales rose 0.9% m/m (last -3.3%). December Industrial Production was up 1.7% m/m (expected 0.5%; last 0.6%) but down 0.3% yr/yr (expected -2.1%; last -1.4%).
  • Hong Kong's Q4 GDP expanded 1.0% qtr/qtr (last 0.7%), growing 3.8% yr/yr (last 3.8%).
  • Australia's Q4 PPI was up 0.8% qtr/qtr (expected 1.1%; last 1.0%), rising 3.5% yr/yr (last 3.5%). December Private Sector Credit was up 0.8% m/m (expected 0.6%; last 0.6%) and Housing Credit was up 0.7% m/m (last 0.6%).
  • Singapore's December Bank Lending reached SGD886.1 bln (last SGD873.1 bln).
  • Eurozone's Q4 GDP expanded 0.3% qtr/qtr (expected 0.2%; last 0.3%), growing 1.3% yr/yr (expected 1.2%; last 1.4%). December Unemployment Rate dipped to 6.2% from 6.3% (expected 6.3%).
  • Germany's flash January CPI was up 0.1% m/m (expected 0.0%; last 0.0%), rising 2.1% yr/yr (expected 2.0%; last 1.8%). December Import Price Index was down 0.1% m/m (expected -0.4%; last 0.5%), falling 2.3% yr/yr (expected -2.6%; last -1.9%). January Unemployment was unchanged (expected 4,000; last 3,000) and Unemployment Rate remained at 6.3%, as expected. Q4 GDP expanded 0.3% qtr/qtr (expected 0.2%; last 0.0%), growing 0.4% yr/yr (expected 0.3%; last 0.3%).
  • U.K.'s December Mortgage Approvals reached 61,010 (expected 65,000; last 64,070) and Mortgage Lending reached GBP4.60 bln (expected GBP4.50 bln; last GBP4.59 bln). December Net Lending to Individuals reached GBP6.10 bln, as expected (last GBP6.60 bln).
  • France's Q4 GDP expanded 0.2% qtr/qtr, as expected (last 0.5%), growing 1.1% yr/yr (expected 1.2%; last 0.9%). December PPI was up 0.2% m/m (last 2.8%), falling 2.0% yr/yr (last -1.5%). Q4 nonfarm payrolls dipped 0.1% qtr/qtr (last 0.0%).
  • Italy's Q4 GDP expanded 0.3% qtr/qtr (expected 0.2%; last 0.1%), growing 0.8% yr/yr (expected 0.5%; last 0.6%). December Unemployment Rate remained at 5.6% (expected 5.8%). December PPI was down 0.7% m/m (last 1.0%), falling 1.4% yr/yr (last -0.2%).
  • Spain's January CPI was down 0.4% m/m (expected -0.3%; last 0.3%) but up 2.4% yr/yr, as expected (last 2.9%). January Core CPI was up 2.6% yr/yr (last 2.6%). Q4 GDP expanded 0.8% qtr/qtr (expected 0.6%; last 0.6%), rising 2.6% yr/yr (expected 2.7%; last 2.8%). November Current Account surplus reached EUR210 mln (last surplus of EUR7.18 bln).
  • Swiss January KOF Leading Indicators decreased to 102.5 from 103.6 (expected 103.1).
• Today's Data:
  • The Producer Price Index for final demand increased 0.5% month-over-month (Briefing.com consensus: 0.2%), with the index for final demand services up 0.7%. The index for final demand, excluding food and energy, jumped 0.6% month-over-month (Briefing.com consensus: 0.3%). On a year-over-year basis, the index for final demand was up 3.0%, unchanged from November, while the index for final demand, excluding food and energy, was up 3.2% versus 3.0% in November.
    • The key takeaway from the report is the lingering 3-handle on the year-over-year changes, which will keep alive concerns about pass-through (to the consumer) and possible margin compression (for wholesalers and retailers) if they don't pass-through their higher costs.
  • The Chicago PMI hit 54.0 in January (Briefing.com consensus 43.0), up from a revised 42.7 (from 43.5) in December.
• Commodities:
  • WTI crude: -0.3% to $65.19/bbl
  • Gold: -11.1% to $4766.90/ozt 
  • Copper: -4.7% to $5.92/lb
• Currencies:
  • EUR/USD: -0.9% to 1.1864
  • GBP/USD: -0.9% to 1.3692
  • USD/CNH: +0.2% to 6.9587
  • USD/JPY: +1.0% to 154.64
• The Week Ahead:
  • Monday: Final January S&P Global U.S. Manufacturing PMI (prior 51.9) at 9:45 ET and January ISM Manufacturing Index (Briefing.com consensus 48.3%; prior 47.9%) at 10:00 ET
  • Tuesday: December Job Openings (prior 7.146 mln) at 10:00 ET
  • Wednesday: Weekly MBA Mortgage Index (prior -8.5%) at 7:00 ET; January ADP Employment Change (Briefing.com consensus 43,000; prior 41,000) at 8:15 ET; Final January S&P Global U.S. Services PMI (prior 52.5) at 9:45 ET;January ISM Non-Manufacturing Index (Briefing.com consensus 53.7%; prior 54.4%) at 10:00 ET; and weekly crude oil inventories (prior -2.30 mln) at 10:30 ET
  • Thursday: Weekly Initial Claims (Briefing.com consensus 210,000; prior 209,000) and Continuing Claims (prior 1.827 mln) at 8:30 ET; and weekly natural gas inventories (prior -242 bcf) at 10:30 ET
  • Friday: January Nonfarm Payrolls (Briefing.com consensus 68,000; prior 50,000), Nonfarm Private Payrolls (Briefing.com consensus 60,000; prior 37,000), Unemployment Rate (Briefing.com consensus 4.4%; prior 4.4%), Average Hourly Earnings (Briefing.com consensus 0.3%; prior 0.3%), and Average Workweek (Briefing.com consensus 34.2; prior 34.2) at 8:30 ET; preliminary February University of Michigan Consumer Sentiment (Briefing.com consensus 54.3; prior 56.4) at 10:00 ET; and December Consumer Credit (Briefing.com consensus $8.4 bln; prior $4.2 bln) at 15:00 ET