Bond Market Update

Short End Fails to Avoid Lower Finish

• U.S. Treasuries had a mixed showing to end the week with the 5-yr note and shorter tenors recording losses while 10s and 30s outperformed, finishing in the green. The Treasury complex was eager to continue trimming this week's losses at the start of the session, but the higher open was rebuffed quickly, sending shorter tenors into the red in mid-morning trade. Comments from Fed Governor Waller contributed to the early selling after he said that he would need to see an improvement in inflation or a significant deterioration in the labor market to consider a rate cut. In addition, the market grew more concerned about the claims made by recent reports that a peace deal with Iran is just around the corner. The early pullback from highs found support shortly after 5s and shorter tenors turned negative while 10s and 30s held onto their gains for the day and for the week. Crude oil gave up $9/bbl this week while the U.S. Dollar Index spent the bulk of the session near its flat line at 99.26, ending the week little changed.
• Yield Check:
  • 2-yr: +2 bps to 4.12% (+4 bps this week)
  • 3-yr: +2 bps to 4.17% (+2 bps this week)
  • 5-yr: +1 bp to 4.27% (+1 bp this week)
  • 10-yr: -3 bps to 4.56% (-4 bps this week)
  • 30-yr: -4 bps to 5.07% (-6 bps this week)

• News:
  • Kevin Warsh was sworn in as Fed Chairman today.
  • China's National Development and Reform Commission pushed back on reports that technology firms were told not to accept foreign investment. 
  • European Central Bank President Lagarde said that the central bank is particularly attentive to second-round effects of inflation while policymaker Demarco said that a June rate hike is likely.
  • Germany's defense minister said that his country's defense spending will exceed 4% of GDP this year.
  • Japan's April National CPI was up 0.1% m/m (last 0.4%), rising 1.4% yr/yr (last 1.5%). April National Core CPI was up 1.4% yr/yr (expected 1.7%; last 1.8%). · South Korea's May Consumer Confidence rose to 106.1 from 99.2.
  • New Zealand's Q1 Retail Sales were up 0.9% qtr/qtr (expected 0.5%; last 0.9%) and Core Retail Sales rose 1.0% qtr/qtr (expected 0.8%; last 1.5%).
  • Germany's Q1 GDP expanded 0.3% qtr/qtr, as expected (last 0.2%), growing 0.4% yr/yr (expected 0.3%; last 0.4%). June GfK Consumer Climate rose to -29.8 from -33.1 (expected -33.7). May ifo Business Climate Index rose to 84.9 from 84.5 (expected 84.2). May Current Assessment rose to 86.1 from 85.4 (expected 85.1) and Business Expectations rose to 83.8 from 83.5 (expected 83.5).
  • U.K.'s April Retail Sales were down 1.3% m/m (expected -0.6%; last 0.6%) and unchanged yr/yr (expected 1.3%; last 1.4%). April Core Retail Sales were down 0.4% m/m (expected -0.3%; last 0.1%), rising 1.1% yr/yr (expected 1.5%; last 1.5%). April Public Sector Net Borrowing reached GBP24.30 bln (expected GBP20.70 bln; last GBP11.50 bln).
  • France's May Business Survey rose to 102 from 100 (expected 100).
• Today's Data:
  • The final reading for the University of Michigan Consumer Sentiment Index for May dropped to 44.8 (Briefing.com consensus: 48.2) from the preliminary reading of 48.2, marking a new historic low. The final reading for April was 49.8. In the same period a year ago, the index stood at 52.2.
    • The key takeaway from the report is that consumers are clearly concerned about rising costs and their ability to out-earn inflation, which they are concerned will increase beyond fuel prices.
  • Conference Board's Leading Economic Index was up 0.1% in April (Briefing.com consensus -0.3%) after falling 0.6% in March.
• Commodities:
  • WTI crude: -0.2% to $96.13/bbl
  • Gold: -0.4% to $4526.90/ozt
  • Copper: +1.4% to $6.38/lb
• Currencies:
  • EUR/USD: UNCH at 1.1611 
  • GBP/USD: +0.1% to 1.3446 
  • USD/CNH: UNCH at 6.7961 
  • USD/JPY: +0.1% to 159.15
• The Week Ahead:
  • Monday: Bond and equity markets closed for Memorial Day
  • Tuesday: March FHFA Housing Price Index (Briefing.com consensus 0.1%; prior 0.0%) and March S&P Case-Shiller Home Price Index (Briefing.com consensus 1.0%; prior 0.9%) at 9:00 ET; May Consumer Confidence (Briefing.com consensus 92.0; prior 92.8) at 10;00 ET; and $69 bln 2-yr Treasury note auction results at 13:00 ET
  • Wednesday: Weekly MBA Mortgage Index (prior -2.3%) at 7:00 ET and $70 bln 5-yr Treasury note auction results at 13:00 ET
  • Thursday: April Personal Income (Briefing.com consensus 0.5%; prior 0.6%), Personal Spending (Briefing.com consensus 0.4%; prior 0.9%), PCE Prices (Briefing.com consensus 0.5%; prior 0.7%), Core PCE Prices (Briefing.com consensus 0.3%; prior 0.3%), Q1 GDP - second estimate (Briefing.com consensus 2.0%; prior 2.0%), Q1 GDP Deflator - second estimate (Briefing.com consensus 4.5%; prior 3.6%), April Durable Orders (Briefing.com consensus 1.7%; prior 0.8%), Durable Orders ex-transport (Briefing.com consensus 0.5%; prior 0.9%), weekly Initial Claims (Briefing.com consensus 214,000; prior 209,000), and Continuing Claims (prior 1.782 mln) at 8:30 ET; April New Home Sales (prior 682,000) at 10:00 ET; weekly natural gas inventories (prior +101 bcf) at 10:30 ET; weekly crude oil inventories (prior -7.863 mln) at 12:00 ET; and $44 bln 7-yr Treasury note auction results at 13:00 ET
  • Friday: May advance International Trade in Goods (prior -$87.9 bln), advance Retail Inventories (prior 0.7%), and advance Wholesale Inventories (prior 1.4%) at 8:30 ET; and May Chicago PMI (Briefing.com consensus 49.5; prior 49.2) at 9:45 ET