Bond Market UpdateUpdated 11:23am EST October 17, 2017
Moving the Market
-- Yield curve slope in focus
-- September Import Prices ex-oil (actual: 0.3%; prior: 0.3%) and Export Prices ex-agriculture (actual: 1.0%; prior: 0.7%)
-- September Industrial Production (actual: 0.3%; Briefing.com consensus: 0.2%: prior: -0.9%) and Capacity Utilization (actual: 76.0%; Briefing.com consensus: 76.1%; prior: 76.1%)
-- October NAHB Housing Market Index (actual: 68; Briefing.com consensus: 64; prior: 64)
-- October Net Long-Term TIC Flows (prior: $1.30 billion) at 16:00 ET
Long Bond OutperformsU.S. Treasuries have climbed off their morning lows with the long bond staging the most impressive recovery. The 30-yr bond sports a modest gain while the 10-yr note is looking to turn positive. Up front, 2s and 5s continue trading in the red, which is putting pressure on the yield curve once again. The 2s10s spread has compressed by a basis point to 76 bps, and it now hovers right at its 2016 low and just above levels that were last seen in late 2007. Yield Check: 2-yr: +1 bp to 1.55% 5-yr: +2 bps to 1.97% 10-yr: UNCH at 2.31% 30-yr: -1 bp to 2.81%
Econ ReconIndustrial production increased 0.3% in September (Briefing.com consensus +0.2%) on the heels of an upwardly revised 0.7% decline (from -0.9%) for August. The capacity utilization rate increased to 76.0% (Briefing.com consensus 76.1%) from a downwardly revised 75.8% (from 76.1%) for August. The key takeaway from the report is that total production in September was held down by the continued effects of Hurricane Harvey and, to a lesser extent, the effects of Hurricane Irma, which combined lowered industrial production growth by 1/4 percentage point. Manufacturing output increased 0.1%, led by a 1.0% increase for durables that was offset by a 0.9% decrease for nondurables Mining output was up 0.4% following a 0.2% decline in August Utilities output jumped 1.5% after declining 4.9% in August The industrial production figure for July was revised to -0.1% from +0.4% On a year-over-year basis, industrial production is up 1.6%. The capacity utilization rate for September is 3.9 percentage points below its long-run average.
Yield check:2-yr: unch at 1.54%5-yr: +2 bps to 1.97%10-yr: +1 bp to 2.32%30-yr: +1 bp to 2.83%
Data ReactionU.S. Treasuries moved to session lows after it was reported that export prices excluding agriculture increased 1.0% in September while import prices excluding oil rose 0.3%. The market has continued drifting near session lows after the release of better than expected September Industrial Production (actual: +0.3%; Briefing.com consensus: 0.2%). Capacity Utilization increased to 76.0% from 75.8% in August (Briefing.com consensus: 76.1%). The post-data slip has lifted the benchmark yield above its 200-day moving average of 2.314%. Yield Check: 2-yr: UNCH at 1.54% 5-yr: +2 bps to 1.97% 10-yr: +1 bp to 2.32% 30-yr: +1 bp to 2.83%
Econ ReconThe Export/Import Price Index report for September showed a 0.7% increase in import prices and a 0.8% increase in export prices. Excluding fuel, import prices increased 0.3% for the second straight month. Excluding agriculture, export prices increased 1.0% on the heels of a 0.8% increase in August. On a year-over-year basis, import prices are up 2.7%, versus a 1.1% decline for the 12 months ending in September 2016. Export prices, meanwhile, are up 2.9%, versus a 1.5% decline for the 12 months ending in September 2016.Nonfuel import prices are up 1.3% year-over-year, versus down 0.6% for the 12 months ending September 2016, while nonagricultural export prices are up 3.0%, versus down 1.3% for the 12 months ending September 2016The key takeaway is that these price trends will validate the prevailing belief that the Federal Reserve is likely to raise the fed funds rate at its December meeting.
Yield check: 2-yr: +1 bp to 1.55%5-yr: +2 bps to 1.97%10-yr: +2 bps to 2.33%30-yr: +2 bps to 2.84%
Yields DipEuropean debt has been in demand today with the UK's gilts at the forefront of the advance. Bank of England Governor Mark Carney said inflation is likely to continue rising after today's data showed the sharpest increase since 2012. European Central Bank Vice President Vitor Constancio said that macroprudential tools need to be taken much more seriously and that there is no general asset price overvaluation in the eurozone. Spain lowered its growth forecast for 2018 to 2.3% from 2.6% due to the turmoil in Catalonia. Spain's budget minister Cristobal Montoro warned that the situation could put Spain in a similar crisis that was seen at the end of 2011. European Economic Data: Eurozone September CPI +0.4% month-over-month, as expected (last 0.3%); +1.5% year-over-year, as expected (last 1.5%). September core CPI +0.4% month-over-month (last 0.3%); +1.1% year-over-year, as expected (last 1.1%). ZEW Economic Sentiment 26.7 (expected 34.2; last 31.7) Germany's October ZEW Economic Sentiment 17.6 (expected 20.0; last 17.0) and ZEW Current Conditions 87.0 (expected 89.0; previous 87.9) Italy's August trade surplus EUR2.77 billion (expected surplus of EUR4.23 billion; last surplus of EUR6.56 billion) UK's September CPI +0.3% month-over-month, as expected (last 0.6%); +3.0% year-over-year, as expected (last 2.9%). September core CPI +2.7% year-over-year, as expected (last 2.7%). September RPI +4.1% year-over-year (consensus 4.2%; last 4.1%). September Input PPI +0.4% month-over-month (expected 1.3%: last 2.3%); +8.4% year-over-year (consensus 8.2%; last 8.4%). House Price Index +5.0% year-over-year (consensus 5.4%; last 4.5%) Yield Check: France, 10-yr OAT: -2 bps to 0.77% Germany, 10-yr bund: -2 bps to 0.36% Greece, 10-yr note: -2 bps to 5.42% Italy, 10-yr BTP: -3 bps to 2.01% Portugal, 10-yr PGB: +1 bp to 2.33% Spain, 10-yr ODE: -2 bps to 1.55% U.K., 10-yr gilt: -5 bps to 1.29%
Looking HigherU.S. Treasuries did not see much movement during overnight action, but a recent wave of buying has weighed on yields, putting the cash market on track for a higher start. The overnight newsflow was fairly light. China State Information Center believes that monetary policy should be tightened due to limited room for loosening seen in 2018. The Reserve Bank of Australia released its latest meeting minutes, which noted that any changes to the official cash rate would be dependent on the domestic economy. It is worth noting that the most recent RBA meeting took place after the release of disappointing Retail Sales for August (actual: -0.6%; consensus: 0.3%), which declined at the sharpest rate since late 2012. Yield Check: 2-yr: -1 bp to 1.53% 5-yr: -1 bp to 1.94% 10-yr: -1 bp to 2.30% 30-yr: UNCH at 2.82% News: New Zealand's Q3 CPI +0.5% quarter-over-quarter (expected 0.4%; last 0.0%); +1.9% year-over-year (consensus 1.8%; last 1.7%) Australia's September New Motor Vehicle Sales -0.5% month-over-month (last 0.0%) Singapore's September trade surplus SGD5.45 billion (last surplus of SGD5.64 billion). September Non-Oil Exports -11.0% month-over-month (expected -0.1%; last 4.2%); -1.1% year-over-year (consensus 12.7%; last 16.7%) Data out Tuesday: September Import Prices ex-oil (prior: 0.3%) and Export Prices ex-agriculture (prior: 0.7%) at 8:30 ET September Industrial Production (Briefing.com consensus: 0.2%: prior: -0.9%) and Capacity Utilization (Briefing.com consensus: 76.1%; prior: 76.1%) at 9:15 ET October NAHB Housing Market Index (Briefing.com consensus: 64; prior: 64) at 10:00 ET October Net Long-Term TIC Flows (prior: $1.30 billion) at 16:00 ET Fed Speakers: Philadelphia Fed President Patrick Harker (FOMC voter) at 13:00 ET
Treasuries Dip in Curve-Flattening TradeU.S. Treasuries began the week on a lower note as modest morning losses grew wider by day's end. Treasuries entered the Monday session on a lower note, but longer-dated issues returned to little changed by midday while 2s and 5s continued slipping into the afternoon. The entire complex faced a wave of afternoon selling after Bloomberg reported that President Trump was impressed with John Taylor's interview for the Fed Chair post, which could become vacant if the president decides against reappointing Janet Yellen. Ms. Yellen is expected to be formally interviewed later this week, according to Politico. The yield curve continued last week's flattening trend with the 2s10s spread compressing to 77 bps from 78 bps on Friday, after an intraday touch of last year's low of 76 bps. Yield Check: 2-yr: +4 bps to 1.54% 5-yr: +4 bps to 1.95% 10-yr: +3 bps to 2.31% 30-yr: +1 bp to 2.82%News: The Empire Manufacturing Survey rose to 30.2 in October (Briefing.com consensus 21.0) from 24.4 in September. Reports indicate that the European Central Bank's governing council is deeply divided on announcing a fixed end date for the asset purchase program. Catalan President Carles Puigdemont sent an evasive response to Prime Minister Mariano Rajoy's request to confirm last week's independence declaration. Spain's Deputy Prime Minister Soraya Saenz de Santamaria said Mr. Puigdemont has until Thursday to return to the rule of law. A Spanish judge ordered the jailing of two leaders of the Catalan independence movement. Austria is on track for a conservative coalition government after 31-year old Sebastian Kurz' People's Party secured 31.6% of the vote, followed by Freedom Party of Austria (20.5%). The new government is likely to push back against the European Union's handling of the migrant crisis. The conflict between Iraq and Kurdistan took a turn for the worse after Iraqi forces seized military installations and oilfields in and around Kirkuk. Commodities: WTI crude: +0.8% to $51.86/bbl Gold: -0.1% to $1303.00/ozt Copper: -0.2% to $3.24/lb Currencies: EUR/USD: -0.2% to 1.1793 USD/JPY: +0.3% to 112.12 Data out Tuesday: September Import Prices ex-oil (prior: 0.3%) and Export Prices ex-agriculture (prior: 0.7%) at 8:30 ET September Industrial Production (Briefing.com consensus: 0.2%: prior: -0.9%) and Capacity Utilization (Briefing.com consensus: 76.1%; prior: 76.1%) at 9:15 ET October NAHB Housing Market Index (Briefing.com consensus: 64; prior: 64) at 10:00 ET October Net Long-Term TIC Flows (prior: $1.30 billion) at 16:00 ET Fed Speakers: Philadelphia Fed President Patrick Harker (FOMC voter) at 13:00 ET