Bond Market Update

Caught In a Crosswind

• U.S. Treasuries spent some time on both sides of their unchanged levels on Friday, but shorter tenors ultimately eked out slim gains while 10s and 30s finished the day with modest losses. Treasuries faced some pressure out of the gate, but they bounced about an hour after the cash start, briefly turning positive in mid-morning trade. However, an extension of this week's rally in crude oil accelerated in the late morning, exerting some renewed pressure on Treasuries due to the inflationary implications. Oil's rally was fueled by concerns about lower supply after Ukraine's overnight attack on a refinery outside of Moscow and intraday speculation that a pipeline in Saudi Arabia was also attacked. The late morning retreat in Treasuries returned action to morning lows, but some late buying, which took place as equities continued struggling, tilted the front end back into positive territory while 10s and 30s did not make it back into the green, but they still finished the week with solid gains. Crude oil advanced nearly $10/bbl for the week, finishing within $6/bbl of its mid-September high (106.75), while the U.S. Dollar Index fell 0.2% to 101.83, losing 0.4% for the week.
• Yield Check:
  • 2-yr: -1 bp to 4.74% (-5 bps this week)
  • 3-yr: -1 bp to 4.83% (-10 bps this week)
  • 5-yr: UNCH at 4.90% (-12 bps this week)
  • 10-yr: +1 bp to 5.10% (-14 bps this week)
  • 30-yr: +1 bp to 5.44% (-16 bps this week)

• News:
  • Japan is delaying the formal adoption of a 3.5% defense spending target.
  • MSCI announced that it is looking at the potential reclassification of Indonesia from an emerging market economy to a standalone market, triggering an 11% plunge in the Jakarta Composite Index.
  • South Korea's September Unemployment Rate 2.6% (prior 2.7%); Import Price Index 17.6% yr/yr (prior 15.9%) and Export Price Index 40.9% yr/yr (prior 42.7%).
  • Eurozone September CPI 0.6% m/m (expected 0.6%; prior 0.4%) and 3.8% yr/yr (expected 3.8%; prior 3.2%); Core CPI 0.2% m/m (expected 0.2%; prior 0.2%) and 2.5% yr/yr (expected 2.5%; prior 2.4%); HICP excluding energy and food 2.2% yr/yr (expected 2.2%; prior 2.1%). August Trade Balance -EUR16.1 bln (prior EUR10.7 bln).
  • Italy's September CPI 0.7% m/m (expected 0.7%; prior 0.5%) and 4.2% yr/yr (expected 4.2%; prior 3.3%); HICP 2.1% m/m (expected 2.0%; prior 0.1%) and 4.2% yr/yr (expected 4.1%; prior 3.2%). August Trade Balance EUR1.773 bln (expected EUR7.500 bln; prior EUR8.247 bln).
• Today's Data:
  • Total industrial production increased 0.7% month-over-month in September, exceeding the 0.4% Briefing.com consensus. The prior month's revised reading showed that production increased 0.1% in August after initially being reported unchanged.
    • The key takeaway from the report is that production strengthened across manufacturing, mining, and utilities, yet capacity utilization remained below its long-run average, signaling firmer output without fully stretched industrial resources.
  • Import prices were up 1.1% in September after increasing a revised 0.5% (from 0.7%) in August. Excluding oil, import prices were up 0.7% after increasing a revised 0.6% (from 0.8%) in August. Export prices were up 2.2% in September after increasing a revised 1.2% (from 0.6%) in August. Excluding agriculture, export prices were up 2.1% after increasing a revised 1.3% (from 0.7%) in August.
• Commodities:
  • WTI crude: +3.6% to $101.40/bbl
  • Gold: +0.3% to $4180.90/ozt
  • Copper: +0.2% to $6.57/lb
• Currencies:
  • EUR/USD: +0.2% to 1.1237
  • GBP/USD: +0.4% to 1.3326
  • USD/CNH: UNCH at 6.6858
  • USD/JPY: UNCH at 158.00
• The Week Ahead:
  • Monday: October NAHB Housing Market Index (Briefing.com consensus 31; prior 32) at 10:00 ET
  • Tuesday: September Housing Starts (Briefing.com consensus 1.305 mln; prior 1.275 mln) and Building Permits (Briefing.com consensus 1.390 mln; prior 1.394 mln) at 8:30 ET; and September Pending Home Sales (Briefing.com consensus 0.1%; prior 0.3%) at 10:00 ET
  • Wednesday: Weekly MBA Mortgage Index (prior -2.7%) at 7:00 ET; weekly crude oil inventories (prior -8.56 mln) at 10:30 ET; and $13 bln 20-yr Treasury bond auction reopening results at 13:00 ET
  • Thursday: Weekly Initial Claims (Briefing.com consensus 200,000; prior 199,000) and Continuing Claims (prior 1.710 mln) at 8:30 ET; September Leading Index (Briefing.com consensus -0.2%; prior -0.1%) at 10:00 ET; and weekly natural gas inventories (prior 67 bcf) at 10:30 ET
  • Friday: Flash S&P Global U.S. Manufacturing PMI (prior 55.9) and flash S&P Global U.S. Services PMI (prior 58.8) at 9:45 ET; final October University of Michigan Consumer Sentiment (Briefing.com consensus 46.3; prior 46.3) at 10:00 ET