Bond Market Update

2-Yr Yield Nears January High

• U.S. Treasuries retreated for the fourth consecutive day, and once again, the long bond fared better than shorter tenors but it also finished in the red. The Treasury complex was pressured from the start after an overnight extension of the rally in the price of oil. That rally has invited worries about a near-term inflationary spike, which would complicate arguments for rate cuts in the U.S. and abroad. For instance, the fed funds futures market is now pricing in just one rate cut before the end of 2026, though that could change after tomorrow's release of the jobs report for February. WTI crude climbed past its 2025 high to $81/bbl, a level not seen since mid-2024 amid a scramble to ensure a sufficient supply. To that point, China ordered its top refiners to suspend exports of refined fuels, according to Bloomberg. Treasuries added to their starting losses in morning trade, but the bulk of intraday action unfolded inside a sideways range with the long bond finishing just above its starting level while 10s and shorter tenors settled a bit below their opening marks. Economic data released this morning included slightly lower than expected weekly Initial Claims (213,000; Briefing.com consensus 216,000) and a preliminary Q4 Productivity report, which showed below-consensus productivity growth (2.8%; Briefing.com consensus 4.0%), coupled with above-consensus growth in unit labor costs (2.8%; Briefing.com consensus 0.2%). Today's retreat lifted the 2-yr yield to a level not seen in nearly six weeks with its January high (3.631%) looming not far above. Crude oil settled at its highest level since July 2024 while the U.S. Dollar Index rose 0.5% to 99.31.
• Yield Check:
  • 2-yr: +6 bps to 3.60%
  • 3-yr: +7 bps to 3.62%
  • 5-yr: +8 bps to 3.74%
  • 10-yr: +7 bps to 4.15%
  • 30-yr: +4 bps to 4.75%

• News:
  • China's National People's Congress set China's 2026 GDP growth target between 4.5% and 5.0% with CPI expected at 2.0%.
  • Japan's largest industrial labor union will seek a pay increase of about 6.5% for regular workers during upcoming Spring Wage talks.
  • Morgan Stanley expects that the European Central Bank will not cut rates until 2027 unless there is a downside shock to growth.
  • DHL noted that air and ocean freight in the Middle East have been heavily disrupted.
  • Maersk suspended cargo bookings to and from several Gulf nations.
  • The Bank of England's Decision Maker Panel survey showed an increase in year-ahead CPI expectations to 3.0% from 2.9% while the three-year outlook was lowered to 2.8% from 2.9%.
  • Australia's January trade surplus reached AUD2.631 bln (expected surplus of AUD3.780 bln; last surplus of AUD3.373 bln) as imports grew 0.8% m/m (last -1.8%) and exports fell 0.9% m/m (last 0.9%).
  • Singapore's January Retail Sales were up 6.1% m/m (last -2.7%) but down 0.4% yr/yr (last 2.5%).
  • Eurozone's January Retail Sales were down 0.1% m/m (expected 0.3%; last 0.2%) but up 2.0% yr/yr (expected 1.7%; last 1.8%).
  • U.K.'s February Construction PMI hit 44.5 (expected 47.0; last 46.4).
  • France's January Industrial Production was up 0.5% m/m (expected 0.4%; last 0.5%).
  • Italy's January Retail Sales rose 0.6% m/m (expected -0.1%; last -0.7%), increasing 2.3% yr/yr (last 1.1%).
  • Spain's January Industrial Production rose 0.3% yr/yr (expected 1.7%; last -0.3%).
  • Swiss February Unemployment Rate rose to 3.0% from 2.9% (expected 2.9%).
• Today's Data:
  • Nonfarm business sector labor productivity increased 2.8% in the fourth quarter (Briefing.com consensus: 4.0%) following an upwardly revised 5.2% (from 4.9%) in the third quarter. Unit labor costs jumped 2.8% in the fourth quarter (Briefing.com consensus: 0.2%) on the heels of an upwardly revised 1.8% decline (from -1.9%) in the third quarter.
    • The key takeaway from the report is that the productivity increase itself was pretty solid, yet that consideration was offset by the comparable jump in unit labor costs that aren't going to help ease concerns about sticky inflation pressures.
  • Import prices rose 0.2% month-over-month but were down 0.1% year-over-year. Excluding fuel, import prices were up 0.5% month-over-month and were up 1.2% year-over-year. Export prices, meanwhile, climbed 0.6% month-over-month in January and were up 2.6% year-over-year. Nonagricultural export prices increased 0.7% month-over-month and were up 2.7% year-over-year. 
  • Initial jobless claims were unchanged at 213,000 for the week ending February 28. Continuing jobless claims increased 46,000 to 1.868 million for the week ending February 21.
    • The key takeaway from the report will be the continuing low level of initial jobless claims, which connotes a labor market that is slow to fire employees.
  • Weekly crude oil inventories decreased by 132 bcf after decreasing by 52 bcf a week ago.
• Commodities:
  • WTI crude: +8.4% to $80.97/bbl
  • Gold: -1.1% to $5080.00/ozt
  • Copper: -1.7% to $5.81/lb
• Currencies:
  • EUR/USD: -0.5% to 1.1572
  • GBP/USD: -0.4% to 1.3320
  • USD/CNH: +0.6% to 6.9277
  • USD/JPY: +0.5% to 157.82
• The Day Ahead:
  • 8:30 ET: February Nonfarm Payrolls (Briefing.com consensus 60,000; prior 130,000), Nonfarm Private Payrolls (Briefing.com consensus 78,000; prior 172,000), Unemployment Rate (Briefing.com consensus 4.3%; prior 4.3%), Average Hourly Earnings (Briefing.com consensus 0.3%; prior 0.4%), Average Workweek (Briefing.com consensus 34.3; prior 34.3), January Retail Sales (Briefing.com consensus -0.1%; prior 0.0%), and Retail Sales ex-auto (Briefing.com consensus 0.2%; prior 0.0%)
  • 10:00 ET: January Business Inventories (prior NA)
  • 15:00 ET: January Consumer Credit (Briefing.com consensus $9.9 bln; prior $24.0 bln)