Bond Market Update

Treasuries Slip Ahead of December Jobs Report

• U.S. Treasuries retreated on Thursday, giving back their midweek gains with the 10-yr note leading the way. The market showed some intraday resilience, but strong economic data kept the complex pressured. Treasuries slipped out of the gate, extending their losses after a trifecta of strong economic reports. The preliminary Q3 Productivity report showed a 4.9% increase in productivity, combined with a 1.9% decrease in unit labor costs. The market also received a surprisingly good trade balance report for October (-$29.4 bln; Briefing.com consensus -$61.3 bln), which showed the smallest deficit since 2009. Initial Claims increased to 208,000, but that was after last week's very low reading of 200,000, and still below the Briefing.com consensus (217,000). The first two reports were good enough to prompt a doubling in the Atlanta Fed's GDPNow forecast for Q4 GDP to 5.4%. The market climbed off morning lows going into the early afternoon, but some late selling returned action to session lows ahead of tomorrow's release of the Employment Situation report for December (Briefing.com consensus 55,000; prior 64,000) and a likely Supreme Court ruling on regarding tariffs. Crude oil climbed back toward its 50-day moving average (58.68) while the U.S. Dollar Index climbed 0.2% to 98.92, inching back above its 200-day moving average (98.95).
• Yield Check:
  • 2-yr: +2 bps to 3.49%
  • 3-yr: +3 bps to 3.55%
  • 5-yr: +4 bps to 3.74%
  • 10-yr: +5 bps to 4.18%
  • 30-yr: +4 bps to 4.86%

• News:
  • The New York Fed's Survey of Consumer Expectations for December showed an increase in year-ahead inflation expectations to 3.4% from 3.2% while three-year and five-year expectations remained at 3.0%.
  • The Congressional Budget Office is projecting 2.2% GDP growth in 2026.
  • President Trump will deliver the State of the Union address on February 24.
  • Shanghai Securities News reported that Chinese investors are rushing into equity funds amid weakness in bond prices.
  • Reserve Bank of Australia Deputy Governor Hauser said that the last interest rate cut of the cycle has likely been made.
  • Bank of England's Decision Maker Panel lowered its year-ahead CPI forecast to 3.2% from 3.4% while three-year outlook was reduced to 2.9% from 3.0%.
  • European Central Bank policymaker Pereira said that price stability is in place and there is no reason to make any changes to policy at this time, echoing a common sentiment shared among ECB policymakers.
  • Japan's November Overall Wage Income was up 0.5% yr/yr (expected 2.3%; last 2.5%) and November Overtime Pay rose 1.2% yr/yr (last 2.1%). December Household Confidence dipped to 37.2 from 37.5 (expected 37.8).
  • Australia's November trade surplus reached AUD2.936 bln (expected surplus of AUD5.140 bln; last surplus of AUD4.353 bln as imports grew 0.2% m/m (last 2.4%) and exports fell 2.9% m/m (last 2.8%).
  • Eurozone's December Business and Consumer Survey fell to 96.7 from 97.1 (expected 97.0). November PPI was up 0.5% m/m (expected 0.4%; last 0.1%) but down 1.7% yr/yr (expected -1.9%; last -0.5%). November Unemployment Rate dipped to 6.3% from 6.4% (expected 6.4%).
  • Germany's November Factory Orders rose 5.6% m/m (expected -0.9%; last 1.6%).
  • U.K.'s December Halifax House Price Index was down 0.6% m/m (expected 0.1%; last -0.1%) but up 0.3% yr/yr (expected 1.1%; last 0.6%).
  • France's November trade deficit reached EUR4.2 bln (expected deficit of EUR4.3 bln; last deficit of EUR3.5 bln) and November Current Account deficit reached EUR800 mln (last surplus of EUR1.40 bln).
  • Italy's November Unemployment Rate dipped to 5.7% from 5.8% (expected 6.0%).
  • Swiss December CPI was unchanged m/m, as expected (last -0.2%), rising 0.1% yr/yr, as expected (last 0.0%).
• Today's Data:
  • Q3 productivity increased 4.9% in the third quarter (Briefing.com consensus: 2.5%) following an upwardly revised 4.1% (from 3.3%) in the second quarter. Unit labor costs decreased 1.9% (Briefing.com consensus: 0.8%) following a downwardly revised 2.9% decline (from 1.0%) in the second quarter.
    • The key takeaway from the report is that it is the golden ticket for the economy (and the Fed, per chance), as it reflects strong growth without labor cost inflation.
  • Initial jobless claims for the week ending January 3 increased by 8,000 to 208,000 (Briefing.com consensus: 217,000). Continuing jobless claims for the week ending December 27 increased by 56,000 to 1.914 million.
    • The key takeaway from the report is that initial claims are quite low to support a view that consumer spending should hold up; however, continuing claims remain high enough to support a view that the Fed will worry enough about a softening in the labor market (i.e., weak hiring activity) such that it remains inclined to pursue easier monetary policy.
  • The U.S. trade deficit in October narrowed sharply to $29.4 billion (Briefing.com consensus: -$61.3 billion) from an upwardly revised deficit of $48.1 billion (from -$59.6 billion) in September. The improvement resulted from exports being $7.8 billion more than September exports and imports being $11.0 billion less than September imports.
    • The key takeaway from the report is that the headline deficit number is the lowest since June 2009. A residual takeaway is that the improvement clearly has something to do with the introduction of higher tariff rates that have detracted from import demand.
  • Consumer credit increased by $4.2 billion in November (Briefing.com consensus: $10.3 billion) following an unrevised $9.2 billion increase in October.
    • The key takeaway from the report is that the expansion in consumer credit in November was driven entirely by nonrevolving credit.
  • Wholesale Inventories increased by 0.2% in October (Briefing.com consensus 0.2%) after increasing 0.5% in September.
  • Weekly natural gas inventories decreased by 119 bcf after decreasing by 38 bcf a week ago.
• Commodities:
  • WTI crude: +3.1% to $57.75/bbl
  • Gold: UNCH at $4461.20/ozt
  • Copper: -1.0% to $5.80/lb
• Currencies:
  • EUR/USD: -0.2% to 1.1652
  • GBP/USD: -0.2% to 1.3434
  • USD/CNH: -0.2% to 6.9829
  • USD/JPY: +0.2% to 156.98
• The Day Ahead:
  • 8:30 ET: December Nonfarm Payrolls (Briefing.com consensus 55,000; prior 64,000), Nonfarm Private Payrolls (Briefing.com consensus 50,000; prior 69,000), Unemployment Rate (Briefing.com consensus 4.5%; prior 4.6%), Average Hourly Earnings (Briefing.com consensus 0.3%; prior 0.1%), Average Workweek (Briefing.com consensus 34.3; prior 34.3), September Housing Starts (Briefing.com consensus 1.320 mln; prior 1.307 mln), September Building Permits (Briefing.com consensus 1.340 mln; prior 1.312 mln), October Housing Starts (Briefing.com consensus 1.340 mln), and October Building Permits (Briefing.com consensus 1.355 mln)
  • 10:00 ET: Preliminary January University of Michigan Consumer Sentiment (Briefing.com consensus 53.0; prior 52.9)