Bond Market Update

Short End Pressured by Strong Jobs Report

• U.S. Treasuries retreated on Wednesday with the short end leading the move, though the entire complex spent the day in a steady rally off lows that were reached in immediate reaction to a stellar jobs report for January (130,000; Briefing.com consensus 68,000). Treasuries started the day with longer tenors tagging fresh highs for the year after a quiet night in international markets. The overnight data slate was on the light side, highlighted by another subdued inflation report from China, which included the 40th consecutive deflationary PPI reading (-1.4% yr/yr). Treasuries plunged from their opening highs after the January jobs report beat expectations on all fronts, showing nonfarm payroll growth of 130,000 (Briefing.com consensus 68,000), average hourly earnings growth of 0.4% (Briefing.com consensus 0.3%), and a dip in the Unemployment Rate to 4.3% (Briefing.com consensus 4.4%). The post-data selling was paced by shorter tenors amid diminishing market expectations for a June rate cut, but a steady intraday bounce helped the 2-yr note recover nearly half of its post-NFP loss while the long bond briefly returned into positive territory before some late backtracking. That backtracking followed an underwhelming $42 bln 10-yr note sale, pressuring the long bond back into the red. Crude oil continued its push toward its January high (66.48) while the U.S. Dollar Index displayed intraday volatility before returning to its flat line at 96.80.
• Yield Check:
  • 2-yr: +6 bps to 3.51%
  • 3-yr: +5 bps to 3.57%
  • 5-yr: +4 bps to 3.74%
  • 10-yr: +3 bps to 4.17%
  • 30-yr: +3 bps to 4.81%

• News:
  • Standard & Poor's noted that outstanding JGBs have an average maturity of about nine years.
  • South Korea's exports were up 44.4% yr/yr through the first ten days of February with chip exports surging 137.6% yr/yr.
  • European Central Bank policymaker Schnabel penned an op-ed in FT, calling for a closer integration of the European common market.
  • China's January CPI was up 0.2% m/m (expected 0.3%; last 0.2%), rising 0.2% yr/yr (expected 0.4%; last 0.8%). January PPI was down 1.4% yr/yr (expected -1.5%; last -1.9%).
  • South Korea's January Unemployment Rate fell to 3.0% from 3.3%.
  • Australia's Q4 Invest Housing Finance increased 7.9% m/m (last 9.2%) and Home Loans rose 10.6% m/m (last 6.2%).
  • Italy's December Industrial Production was down 0.4% m/m (expected -0.6%; last 1.5%) but up 3.2% yr/yr (last 1.4%).
• Today's Data:
  • January nonfarm payrolls increased by 130,000 (Briefing.com consensus: 68,000). The 3-month average for total nonfarm payrolls increased to 73,000 from -17,000. December nonfarm payrolls revised to 48,000 from 50,000. November nonfarm payrolls revised to 41,000 from 56,000.
    • January private sector payrolls increased by 172,000 (Briefing.com consensus: 60,000). December private sector payrolls revised to 64,000 from 37,000. November private sector payrolls revised to 72,000 from 50,000. 
    • January unemployment rate was 4.3% (Briefing.com consensus: 4.4%) versus 4.4% in December. Persons unemployed for 27 weeks or more accounted for 25.0% of the unemployed versus 26.0% in December. The U6 unemployment rate, which accounts for unemployed and underemployed workers, decreased to 8.0% from 8.4% in December.
    • January average hourly earnings were up 0.4% (Briefing.com consensus: 0.3%) versus a downwardly revised 0.1% increase (from 0.3%) in December. Over the last 12 months, average hourly earnings have risen 3.7%, unchanged from the 12 months ending in December.
    • The average workweek in January was 34.3 hours (Briefing.com consensus: 34.2) versus 34.2 hours in December. The manufacturing workweek increased 0.1 hour to 40.0 hours. Factory overtime was unchanged at 2.9 hours.
    • The labor force participation rate increased to 62.5% from 62.4% in December and the employment-population ratio increased to 59.8% from 59.7% in December.
  • The Treasury's budget deficit was $94.6 billion in January (Briefing.com consensus: -$190.0B), which was much narrower than expected and a notable improvement from the same period a year ago when it was $128.6 billion. Receipts totaled $559.9 billion, while outlays summed to $654.6 billion.
    • The key takeaway from the report is that it shows the benefits of collecting customs duties as a means of reducing the deficit. At the same time, it also reflects the onerous interest costs stemming from the high amount of debt issuance needed to fund government operations.
  • Weekly crude oil inventories increased by 8.53 million barrels after decreasing by 3.46 million barrels a week ago.
  • $42 bln 10-year Treasury note auction results (prior 12-auction average):
    • High yield: 4.177% (4.277%).
    • Bid-to-cover: 2.39 (2.54).
    • Indirect bid: 64.5% (71.2%).
    • Direct bid: 22.1% (18.6%).
• Commodities:
  • WTI crude: +0.9% to $64.60/bbl
  • Gold: +1.4% to $5098.20/ozt
  • Copper: +1.2% to $5.97/lb
• Currencies:
  • EUR/USD: -0.2% to 1.1876
  • GBP/USD: -0.1% to 1.3631
  • USD/CNH: UNCH at 6.9078
  • USD/JPY: -0.8% to 153.06
• The Day Ahead:
  • 8:30 ET: Weekly Initial Claims (Briefing.com consensus 230,000; prior 231,000), and Continuing Claims (prior 1.844 mln)
  • 10:00 ET: January Existing Home Sales (Briefing.com consensus 4.21 mln; prior 4.35 mln)
  • 10:30 ET: Weekly natural gas inventories (prior -360 bcf)
• Treasury Auctions:
  • 13:00 ET: $25 bln 30-yr Treasury bond auction results