Bond Market Update

Shorter Tenors Secure Perfect Week

• U.S. Treasuries finished the week on a mostly higher note, though a slight dip in the long bond prevented the complex from recording a perfect week. The Friday session was very quiet, as Treasuries navigated a sideways range, keeping yields at two-week lows. The trading day started with slim gains after overnight action saw the release of better-than-feared CPI reports from Japan and Germany with Tokyo CPI for April decelerating to 1.4% (expected 1.5%) from 1.5% while Germany's flash CPI for May slowed to 2.6% (expected 2.9%) from 2.9%. There were no new reported developments in U.S.-Iran negotiations, but oil dipped back below $88/bbl, making for another slightly supportive factor. Treasuries started the session near yesterday's intraday highs, followed by some brief early backtracking, but they stayed in positive territory, maintaining a sideways range into the close. The long bond underperformed slightly, finishing just below its flat line while shorter tenors added to this week's gains that pressured yields back to levels from mid-May. Crude oil finished the month at levels last seen in mid-April while the U.S. Dollar Index slipped 0.1% to its 50-day moving average at 98.90. The Index lost 0.4% for the week but added 0.8% in May.
• Yield Check:
  • 2-yr: -1 bp to 4.01% (-11 bps this week; +24 bps in May)
  • 3-yr: -1 bp to 4.06% (-11 bps this week; +15 bps in May)
  • 5-yr: -1 bp to 4.15% (-12 bps this week; +13 bps in May)
  • 10-yr: UNCH at 4.45% (-11 bps this week; +6 bps in May)
  • 30-yr: +1 bp to 4.99% (-8 bps this week; UNCH in May)

• News:
  • Japan's Finance Minister Katayama warned that a currency intervention is possible at any time with the yen back near this year's low against the dollar in the 160 area.
  • The People's Bank of China called on banks to increase lending amid ongoing weakness in credit issuance.
  • Bank of England Governor Bailey said that rate cuts should not be expected at this time and that policy has been tightened sufficiently.
  • U.K.'s Andy Burnham, who could become the next prime minister, said that there should be more state involvement in the economy.
  • Japan's May Tokyo CPI was up 1.4% yr/yr (last 1.5%) and Tokyo Core CPI was up 1.3% yr/yr (expected 1.5%; last 1.5%). April Industrial Production rose 0.8% m/m (expected -0.4%; last -0.4%), April Retail Sales rose 2.1% yr/yr (expected 1.4%; last 1.4%), April jobs/applications ratio remained at 1.18, as expected, and April Unemployment Rate fell to 2.5% from 2.7% (expected 2.7%). April Housing Starts jumped 11.4% yr/yr (expected 14.7%; last -29.3%) and Construction Orders were down 32.3% yr/yr (last -14.4%). May Household Confidence rose to 33.6 from 32.2 (expected 32.3).
  • South Korea's April Retail Sales fell 3.6% m/m (last 1.9%), April Industrial Production fell 0.7% m/m (expected 0.3%; last 0.6%), rising 1.5% yr/yr (expected 2.2%; last 3.9%). April Service Sector Output was down 1.0% m/m (last 1.5%).
  • Singapore's April Bank Lending reached SGD908.4 bln (last SGD902.3 bln).
  • Germany's May Unemployment decreased by 12,000 (expected 11,000; last 20,000) and May Unemployment Rate fell to 6.3% from 6.4% (expected 6.4%). April Import Price Index was up 1.2% m/m, as expected (last 3.6%), rising 5.3% yr/yr, as expected (last 2.3%).
  • France's Q1 GDP contracted 0.1% qtr/qtr (expected 0.0%; last 0.2%) but was up 0.9% yr/yr (expected 1.1%; last 1.3%). May CPI was up 0.1% m/m (expected 0.2%; last 1.0%), rising 2.4% yr/yr (expected 2.5%; last 2.2%). April Consumer Spending was down 0.5% m/m (expected -0.1%; last 0.9%). Q1 nonfarm payrolls were unchanged qtr/qtr (expected -0.1%; last -0.1%).
  • Italy's May CPI rose 0.4% m/m (expected 0.1%; last 1.1%), increasing 3.2% yr/yr, as expected (last 2.7%). Q1 GDP expanded 0.3% qtr/qtr (expected 0.2%; last 0.3%), growing 0.8% yr/yr (expected 0.7%; last 0.8%). April Unemployment Rate dipped to 5.1% from 5.2% (expected 5.3%).
  • Spain's May CPI was up 0.1% m/m (expected 0.2%; last 0.4%), rising 3.2% yr/yr (expected 3.3%; last 3.2%). May Core CPI was up 2.9% yr/yr (last 2.8%). March Current Account surplus reached EUR4.61 bln (last surplus of EUR4.04 bln).
  • Swiss May KOF Leading Indicators rose to 98.0 from 97.8, as expected.
• Today's Data:
  • The Chicago PMI hit 62.7 in May (Briefing.com consensus 49.5), up from 49.2 in April.
  • The advance goods trade deficit narrowed to $82.4 bln in April from a revised $85.3 bln (from -$87.9 bln) in March.
  • Advance April Retail Inventories were up 0.6% in April after rising 0.7% in March.
  • Advance Wholesale Inventories were up 0.5% in April after rising a revised 1.5% (from 1.3%) in March.
• Commodities:
  • WTI crude: -1.7% to $87.42/bbl
  • Gold: +1.3% to $4592.70/ozt
  • Copper: -0.6% to $6.39/lb
• Currencies:
  • EUR/USD: +0.2% to 1.1668
  • GBP/USD: +0.2% to 1.3465
  • USD/CNH: -0.1% to 6.7649 
  • USD/JPY: UNCH at 159.22
• The Week Ahead:
  • Monday: Final May S&P Global U.S. Manufacturing PMI (prior 55.3) at 9:45 ET; April Construction Spending (Briefing.com consensus 0.3%; prior 0.6%) and May ISM Manufacturing Index (Briefing.com consensus 53.1%; prior 52.7) at 10:00 ET
  • Tuesday: April Job Openings (prior 6.866 mln) at 10:00 ET
  • Wednesday: Weekly MBA Mortgage Index (prior -8.5%) at 7:00 ET; May ADP Employment Change (Briefing.com consensus 110,000; prior 109,000) at 8:15 ET; final May S&P Global U.S. Services PMI (prior 50.9) at 9:45 ET; April Factory Orders (Briefing.com consensus 3.5%; prior 1.5%) and May ISM Non-Manufacturing Index (Briefing.com consensus 53.6%; prior 53.6%) at 10:00 ET; and weekly crude oil inventories (prior -3.327 mln) at 10:30 ET
  • Thursday: Revised Q1 Productivity (Briefing.com consensus 0.8%; prior 0.8%), Unit Labor Costs (Briefing.com consensus 2.3%; prior 2.3%), weekly Initial Claims (Briefing.com consensus 216,000; prior 215,000), and Continuing Claims (prior 1.786 mln) at 8:30 ET; and weekly natural gas inventories (prior +92 bcf) at 10:30 ET
  • Friday: May Nonfarm Payrolls (Briefing.com consensus 96,000; prior 115,000), Nonfarm Private Payrolls (Briefing.com consensus 89,000; prior 123,000), Unemployment Rate (Briefing.com consensus 4.3%; prior 4.3%), Average Hourly Earnings (Briefing.com consensus 0.3%; prior 0.2%), and Average Workweek (Briefing.com consensus 34.3; prior 34.2) at 8:30 ET; and April Consumer Credit (Briefing.com consensus $17.5 bln; prior $24.9 bln) at 15:00 ET