Treasuries Trim Week's Losses on Decline in Hourly Earnings

U.S. Treasuries followed through on Thursday's afternoon rally today as average hourly earnings growth in the U.S. fell short of expectations for November. While the rest of the employment report painted a picture of steady jobs growth and sharply declining slack in the labor market, Treasuries were down quite sharply from November's slide and investors took advantage of the pause in positive economic surprises to lock in higher yields by buying bonds. The U.S. Dollar Index fell 0.27% to 100.77 as dollar bulls saw a chance to take profits and the S&P 500 is down 0.05% to 2,190. The Italian referendum will take place on Sunday and ISM Non-Manufacturing kicks off next week's U.S. data flow on MondayYield Check:
2-yr: -4 bps to 1.11%5-yr: -8 bps to 1.82%10-yr: -6 bps to 2.39%30-yr: -5 bps to 3.06%News:
Nonfarm payrolls rose 178K in November versus the Briefing.com consensus of 180K. October's reading was revised down to 142K from 161K and September's number was revised to 208K from 191KNonfarm private payrolls grew by 156K versus the Briefing.com consensus of 170K. October saw private payroll growth of 142KAverage hourly earnings fell 0.1% m/m, missing the Briefing.com consensus for 0.2% growth. October's growth was 0.4%The unemployment rate fell to 4.6%, well below the Briefing.com consensus of 4.9%. The UE rate was 4.9% in OctoberThe average workweek remained at 34.4, in line with the Briefing.com consensusCommodities:
WTI crude: +1.06% to $51.60/bbl.Gold: +0.53% to $1,173.1/troy oz.Copper: -0.62% to $2.6265/lb.Currencies:
EUR/USD: -0.06% to 1.0658USD/JPY: -0.08% to 113.69Week Ahead:Monday: New York Fed President Dudley (FOMC voter) (08:30 ET); Chicago Fed President Evans (FOMC voter in 2017) (09:25 ET); November ISM Services (10:00 ET); St. Louis Fed President Bullard (FOMC voter in 2016) (14:05 ET)Tuesday: Q3 Productivity and Unit Labor Costs - Revised (08:30 ET); October Trade Balance (08:30 ET); October Factory Orders (10:00 ET)Wednesday: MBA Mortgage Index for the week ending 12/03 (07:00 ET); Crude Inventories for the week ending 12/03 (10:30 ET); October Consumer Credit (15:00 ET)Thursday: Initial Jobless Claims for the week ending 12/03 and Continuing Jobless Claims for the week ending 11/26 (08:30 ET); Natural Gas Inventories for the week ending 12/03 (10:30 ET)Friday: December Michigan Sentiment (10:00 ET); October Wholesale Inventories (10:00 ET)

Dollar Dips Again Ahead on Softer Wage Growth

The U.S. Dollar Index is down 0.28% to 100.76 as the greenback declines against all of the majors. Sterling was the star performer again today as a by-election in south-west London handed a big victory to the Liberal Democrat, indicating support for a stronger relationship with Europe. David Davis said on Thursday that the government would consider paying into the EU budget for access to the European Union's internal market and this has encouraged bargain hunting in sterling. The antipodean currencies also performed well today as Australian retail sales topped estimates and commodity prices moved higher. The Mexican peso and Russian ruble gained today as oil prices traded higher. Brent crude is up 0.69% to $54.31/bbl.EUR/USD: -0.04% to 1.0659The eurozone's producer price index jumped 0.8% m/m in October, far more than economists had expected. September's growth was 0.1%
Spanish unemployment increased by 24.8K workers in November, badly missing forecasts for a decline. Unemployment rose 44.7K in OctoberGBP/USD: +0.99% to 1.271The U.K.'s construction purchasing managers' index unexpectedly climbed to 52.8 for November from 52.6 in OctoberUSD/CHF: +0.01% to 1.0107Switzerland's GDP was unchanged q/q in the third quarter (+1.3% y/y), missing expectations and falling short of Q2's 0.6% growthUSD/JPY: -0.01% to 113.76Japan's monetary base was up 21.5% y/y in November after growing 22.1% in October USD/CNY: +0.01% to 6.886USD/TRY: +0.41% to 3.5135 Turkish President Recep Tayyip Erdogan said today that the way to revive the economy was for the central bank to cut interest rates. The Turkish lira fell as low 3.59 to the dollar following the remarkUSD/CAD: -0.10% to 1.3291Canadian employment grew by 10.7K workers in November, beating expectations for a decline of 20K. October's reading was +43.9KLabor productivity rose 1.2% q/q in the third quarter, exceeding estimates and reversing Q2's 0.2% dropThe unemployment rate unexpectedly fell to 6.8% in November from 7.0% in OctoberAUD/USD: +0.27% to 0.7449Australian retail sales rose 0.5% mm/ in October, beating forecasts but slowing form September's 0.5% rateNZD/USD: +0.61% to 0.7140

Treasuries Maintain Gains

Treasuries are trading near their best levels of the session as the U.S. Dollar Index trades down 0.37% to 100.67, near its session low (100.65). Again, the Treasury market's sell-off got very extended this week and there is an opportunity for a tradeable bounce. Of course, the dominant trend remains lower for Treasury prices and the further yields fall from our resistance levels of 2.48% in the 10-year and 3.15% in the 30-year, the worse the risk/reward proposition for betting on a countertrend. The S&P 500 is up just 0.04% to 2,191.9 and WTI crude is up 0.55% to $51.34/bbl. as the bull market in oil climbs a wall of worry about cheating among the OPEC members on its Wednesday supply-cut deal. Gold is up 0.69% to $1,175/troy oz.The November jobs report released this morning was so-so but by no means opened up the possibility of a hold on rates at the FOMC's December 13-14. The committee is still virtually guaranteed to hike at that time. There was some hand wringing today over the 0.1% m/m decline in average hourly earnings but as we noted in the 10:47 ET comment, hourly earnings growth tends to fall below trend during survey periods that do not include the 15th of the month. Add that in to the fact that AHE grew by 0.4% in October and the 0.1% decline in November doesn't look so badSterling continues to trade higher today, now up 0.78% to $1.2683 as optimism grows that the U.K. will maintain some access to the EU's internal market in its Brexit deal. Brexit Minister David Davis said on Thursday that the U.K. would consider paying money into the EU budget for such access. Furthermore, a Liberal Democrat candidate won a by-election in south-west London and this was seen by traders as a political point for the "Remain" campYield Check:2-yr: -5 bps to 1.10%5-yr: -8 bps to 1.82%10-yr: -7 bps to 2.38%30-yr: -6 bps to 3.04%

Fed Clears One More Hurdle: The Dollar Index was testing the 101 level overnight but failed to hold its ground. The November jobs number was released to little fanfare. Hourly Earnings did see a 0.1% decline from the prior month but one figure will not be enough to offset the Fed. The report all but put the nail in the coffin for a rate hike in December.

The euro has been able to maintain its gains from yesterday. The move is notable as it comes ahead of an Italian referendum and Austrian elections that could reflect popular support for leaving the European Union. There are two items in favor of the euro. The first is rumors yesterday that the ECB may look to signal an eventual end to the tapering program at its December 8 meeting. The other was today's Eurozone PPI number which came in well above expectations (+0.8% vs +0.4% expectations) driven by higher energy prices. This will be counted as transitory due to favorable comparisons but it will certainly put pricing figures on the radar.The pound continues to be one of the big winners in currency markets over the past couple of weeks. Sterling has now marched to 1.2680 and it has recovered all its flash crash losses. A Construction PMI number was the latest in a long line of sentiment surveys that outpaced expectations.The yen has bounced higher as we are seeing some risk aversion creep into markets. The 113-115 area played a roll in support back in February and March so investors will be looking for a pause in the yen decline until some of the bigger macro events for December play out.

Stocks Dip and Treasuries Hold Strong

Treasuries are holding onto their gains today as the S&P 500 pulls back from an intraday high around 2,198 to add just 0.09% at 2,192.9The U.S. Dollar Index is down 0.29% to 100.75 and that is helping to support gold, now up 0.69% to $1,175/troy oz.WTI crude is up 0.61% to $51.35/bbl.The big upcoming events are this weekend's Italian referendum. The measure is seen as 70% likely to fail. The U.S. ISM Non-Manufacturing Index, the biggest survey for the U.S. economy, will be released at 10:00 ET on Monday. Next week's U.S. economic data calendar is fairly light after that but the European Central Bank's Governing Council will release its monetary policy decision on Thursday. A decision on whether or not to extend the asset purchase program (seen as a virtual lock) is likely to come at that time. Early next week, the blackout period on Fed speakers ahead of the December 13-14 FOMC meeting beginsYield Check:2-yr: -4 bps to 1.11%5-yr: -8 bps to 1.82%10-yr: -7 bps to 2.38%30-yr: -6 bps to 3.05%

5 and 10-Year Notes Lead Higher

Treasuries remain higher this morning as bargain hunters continue to sift through the detritus of November's bond rout. The S&P 500 has edged 0.31 to 2,197.8 and the U.S. Dollar Index is down 0.37% to 100.67. WTI crude is up 0.59% to $51.36/bbl. and gold is up 0.65% to $1,174.5/troy oz.Bill Gross, the billionaire bond fund manager now at Janus, is not having any of the Trump reflation optimism:A strong dollar and continuing structural headwinds including aging demographics, de-globalization trade policies, and accelerating debt-to-GDP in almost all countries at now higher interest rates, promise to contain productivity at perhaps 1 percent annual growth rates and therefore real GDP growth at 2 percentAn investor should move to cash and cash alternatives, such as high probability equity arbitrage situationsMore from BloombergEconomics 101 says that an economy that is running close to full capacity (unemployment below 5%) should not be able to grow much faster because of fiscal stimulus because the stimulus will be offset by interest rate hikes from the central bank (monetary offset). The reality is obviously more complex. It is possible that supply-side reforms like tax simplification could generate economic growth but the U.S. is less ripe for structural reforms than Europe and plans to convert Medicare into a premium support system could hit consumer spending pretty hard. Confidence about healthcare costs past the age of 65 surely underpins a lot of spending for Americans in the run-up to their retirements. Since the U.S. federal government is really just a big insurance company with a military, it's hard to see where big changes happen outside of defense, Social Security, and Medicare. Emasculating the EPA will not bring back coal unless it makes natural gas a lot more expensive. But corporate tax reductions are sure to boost earnings although it will induce writedowns of deferred tax assets at some financial institutions (deferred tax deductions are worth less when tax rates are lower)All of these ins and outs can be debated till the cows come home, usually with partisan bias. The thing that we on the bond page have trouble forgetting is that there has not been a bear market since 2008-2009 and equities remain rather rich for a low-growth world with rising interest rates. Bear markets are things that happen regularly in history. The optimism regarding stocks that aroused investors in late-November has failed to push equities into the parabolic run-up that is sometimes seen at the end of a bull market. Instead, large-cap technology stocks are trading lower (in some cases below 200-day SMAs). This could just be sector rotation into financials or it could be something elseIn any event, the bond market got a little bit ahead of itself this week, particularly on fear that the U.S. Treasury would issue debt with maturities longer than 30 years. Higher yields are probably on the way but we think that a tradeable rally is underway. If the 10-year yield can hold below 2.385%, then the next support levels (in yield) are 2.30% and 2.18%Yield Check:2-yr: -4 bps to 1.11%5-yr: -8 bps to 1.82%10-yr: -7 bps to 2.38%30-yr: -6 bps to 3.04%

Yields Fall Further

The Treasury market is sitting on strong gains today after the November jobs report came up weaker than expected. While the unemployment rate did decline to 4.6% from 4.9%, the fall was driven mostly people leaving the workforce. The 0.1% m/m decline in average hourly earnings is not as bad as it seems at first blush (see note below). The S&P 500 is up 0.26% to 2,196.8 and the U.S. Dollar Index is down 0.19% to 100.85. Gold is up 0.64% to $1,174.4/troy oz. and WTI crude is up 0.84% to $51.49/bbl. on the tailwind from the OPEC deal on WednesdayThe Wall Street Journal notes this morning that delinquencies on subprime auto loans is at its highest level since 2010. While the label "subprime sounds scary," the problem with subprime mortgage lending of the mid 2000s was that flimsy loans were supporting an asset price bubble -- that is, buyers of the homes expected price appreciation to help them repay their mortgages. Since subprime auto loans are not mostly used by collectors to buy automobiles, that dynamic is not at play here. Nevertheless, the story bears watchingAs this page is concerned with all things monetary and financial, India's sudden move to withdraw the 500 and 1,000 rupee banknotes is an interesting experiment in limiting the use of cash currency. 1,000 rupees is equivalent to about $15, so these are frequently used banknote denominations. The measure has caused strife in rural areas where access to banks is limitedYield Check:2-yr: -6 bps to 1.10%5-yr: -8 bps to 1.83%10-yr: -7 bps to 2.38%30-yr: -5 bps to 3.06%Ian Sheperdson, the chief economist at Pantheon Economics, notes that hourly earnings growth tends to be very weak when the survey period does not include the 15th of the month, as it did not this month

Treasuries Rally Back

The Treasury market has settled into gains although the yield curve has steepened since the initial post-data release spike. The S&P 500 is up 0.12% to 2,93.7 and the U.S. Dollar Index is down 0.17% to 100.87. WTI crude has reversed early losses to add 0.27% at $51.20/bbl. and gold is up 0.53% to $1,173.1/troy oz.The November employment report was by no means weak enough to significantly change the probability of a rate hike at the FOMC's December 13-14 meeting but it did throw up some questions around the U.S. reflation theme that has permeated markets since the November 8 election. There remains a high probability that the Republican Congress will pass large tax cuts and that the legislation will be signed by the new President Trump. The infrastructure plans continue to sound like tax credit schemes which may or may not induce the desired level of investment. In any case, the direct benefits to fiscal stimulus will not take effect until H2 2017 although positive effects on business confidence could materialize sooner. The financial industry has obviously benefited simply from higher long-term Treasury yields and the prospect of financial deregulation. The indirect contractionary effects of this expected fiscal stimulus, however, are already here. Interest rates are markedly higher across the curve and the dollar is stronger. These two developments risk destabilizing developing economies that have large dollar-denominated debt burdens and slowing economic growth in the U.S. itselfThe FT noted this morning that the Hong Kong interbank borrowing rate for offshore renminbi (CNH) overnight loans jumped above 7% today, putting the rate up almost six percentage points this weekThis is likely a move by the People's Bank of China to make it more expensive to take short positions in the Chinese currencyUSD/CNY is at 6.89% today, up 0.01%Yield Check:2-yr: -4 bps to 1.11%5-yr: -6 bps to 1.84%10-yr: -5 bps to 2.41%30-yr: -3 bps to 3.08%

Treasuries Give Back Chunk of Morning Rally

The factors at play this morning should be a perfect storm for a rally in the Treasury market. The 10 and 30-year yields rose to their broken uptrends yesterday (~2.48% and ~3.15%, respectively), the market is deeply oversold and already pricing in fiscal stimulus that won't materialize until H2 2017, global equities are moving lower, and now average hourly earnings actually fell in November. That is not to say that Treasury prices have to go higher but simply that this is the best set-up in a while. The dominant trend remains lower, of course, but markets do no not move in straight lines. If the 10-year yield can push below its 2.385% level, the 61.8% Fibonacci retracement of the 12/2013 to 7/2016 move lower in yield, then further declines in yield become more probableThe S&P 500 is set to open down 0.06% to 2,189.5 and WTI crude is down 0.43% to $50.84/bbl. The U.S. Dollar Index is down just 0.02% to 101.02 and gold is up 0.16% to $1,168.8/troy oz.Yield Check:2-yr: -2 bps to 1.14%5-yr: -3 bps to 1.88%10-yr: -2 bps to 2.43%30-yr: -2 bps to 3.09%10-Year Yield (Daily):

30-Year Yield (Daily):

Unemployment Rate Falls to 4.6%

The November jobs report was disappointing on balance and that helped rally the Treasury market from very oversold levelsAverage hourly earnings fell 0.1% m/m, missing the Briefing.com consensus for 0.2% growth. October's growth was 0.4%, however, so the trend for hourly earnings is still higher but just not as strong as previously thoughtNonfarm payrolls rose 178K in November versus the Briefing.com consensus of 180K. October's reading was revised down to 142K from 161KNonfarm private payrolls grew by 156K versus the Briefing.com consensus of 170K. October saw private payroll growth of 142KThe unemployment rate fell to 4.6%, well below the Briefing.com consensus of 4.9%. The UE rate was 4.9% in OctoberThe average workweek remained at 34.4, in line with the Briefing.com consensusThe U.S. Dollar Index is down 0.18% to 100.86 and the S&P 500 is set to open down 0.05% to 2,189.7WTI crude is down 061% to $50.75/bbl. and gold is up 0.44% to $1,172/troy oz.Yield Check:2-yr: -4 bps to 1.11%5-yr: -6 bps to 1.85%10-yr: -5 bps to 2.40%30-yr: -4 bps to 3.06%

European Yields Decline Ahead of Italian Referendum

European government bonds are almost all trading higher today with the exception of the Nordic countries as Finland's GDP growth surprised to the upside. Today's session is the last one before the Italian constitutional reform referendum on Sunday. One-week implied volatility for EUR/USD is up to 18%, almost a one-year high, meaning that traders are willing to pay more to protect against large swings in the currency pair. Italy's 10-year BTP yield is down six basis points to 1.98% today after touching a 16-month high of 2.22% on November 14. Sitting at 165 basis points over the German bund yield at the same maturity, a further widening of the spread would require serious doubts about the sustainability of Italy's sovereign debt. Debt/GDP is currently at 130%. The European Central Bank said this week that it could act to dampen volatility in the market for Italian sovereign debt in the immediate aftermath of Sunday's voteEuropean Economic Data:Switzerland's GDP was unchanged q/q in the third quarter (+1.3% y/y), missing expectations and falling short of Q2's 0.6% growthFinland's GDP grew by 0.4% q/q in the third quarter (1.6% y/y)The U.K.'s construction purchasing managers' index unexpectedly climbed to 52.8 for November from 52.6 in OctoberThe eurozone's producer price index jumped 0.8% m/m in October, far more than economists had expected. September's growth was 0.1%Spanish unemployment increased by 24.8K workers in November, badly missing forecasts for a decline. Unemployment rose 44.7K in OctoberYield Check:
France, 10-yr OAT: -3 bps to 0.78%Germany, 10-yr bund: -4 bps to 0.33% Greece, 10-yr note: -6 bps to 6.40%Italy, 10-yr BTP: -6 bps to 1.98%Portugal, 10-yr PGB: -7 bps to 3.69%Spain, 10-yr ODE: -3 bps to 1.56%U.K., 10-yr gilt: -6 bps to 1.30%

Treasuries Gain Ahead of Nonfarm Payrolls

U.S. Treasuries are following through on Thursday's afternoon rally today ahead of the November jobs report and the Italian referendum over the weekend. The yield curve is flattening as global equity markets (including U.S. equity index futures) lose ground. The international economic news flow was light although Swiss GDP growth came up quite short for Q3 and eurozone producer prices rose more than expected in October. WTI crude has pulled back from as high as $51.80 yesterday to lose 1.02% to $50.54/bbl. today. The U.S. Dollar Index is down 0.10% to 100.94 and gold is up 0.38% to $1,171.3/troy oz. The S&P 500 is set to open down 0.13% to 2,188.2Yield Check:2-yr: -1 bp to 1.14%5-yr: -2 bps to 1.88%10-yr: -2 bps to 2.43%30-yr: -3 bps to 3.07%International News:Australian retail sales rose 0.5% mm/ in October, beating forecasts but slowing form September's 0.5% rateJapan's monetary base was up 21.5% y/y in November after growing 22.1% in October Switzerland's GDP was unchanged q/q in the third quarter (+1.3% y/y), missing expectations and falling short of Q2's 0.6% growthThe U.K.'s construction purchasing managers' index unexpectedly climbed to 52.8 for November from 52.6 in OctoberThe eurozone's producer price index jumped 0.8% m/m in October, far more than economists had expected. September's growth was 0.1%Spanish unemployment increased by 24.8K workers in November, badly missing forecasts for a decline. Unemployment rose 44.7K in OctoberIndustrial production in Brazil fell 7.3% y/y in October (-1.1% m/m), missing forecasts and accelerating from September's 4.7% dropThe IPC-Fipe Inflation Index increased by 0.15% m/m in November, slower than expectations and slower than October's 0.27% riseData out Today:
November Employment Situation Report (08:30 ET)Fed Speaker:Fed Governor Brainard (FOMC voter) (08:45 ET)Fed Governor Tarullo (FOMC voter) (12:30 ET)

Treasuries Drop but End up from Lows

The U.S. Treasury market lost significant ground today as higher oil prices, strong sentiment at eurozone manufacturers, and a better-than-expected ISM U.S. Manufacturing Index reading pushed interest rates higher in Europe and the United States. Higher interest rates have started to erode sentiment in large-cap U.S. technology stocks and the S&P 500 is down 0.3% to 2,190/4. As the losses in stocks deepened, Treasuries started to see some safe-haven buying interest and they held that rally into the close. Initial jobless claims jumped to a five-month high today but the data series remains consistent with steady labor market growth. The U.S. Dollar Index is down 0.44% to 101.05. Dallas Fed President Robert Kaplan, who will vote on the FOMC in 2017, said today that Fed policy must factor in the buck's recent strengthYield Check:
2-yr: +2 bps to 1.14%5-yr: +5 bps to 1.89%10-yr: +6 bps to 2.44%30-yr: +6 bps to 3.10%News:The ISM Manufacturing Index rose to a five-month high of 53.2 for November, up from 51.9 in October. The Briefing.com consensus was 52.1
The employment subindex fell to 52.3 from 52.9New orders rose to 53.0 from 52.1Prices paid remained at 54.5U.S. construction spending grew by 0.5% m/m in October ending three straight months of declines
Public spending was 2.8% vs. 0.4% priorPrivate spending was down 0.2% vs. -0.1% priorInitial jobless claims for the week ending November 26 rose to 268K. That was the highest level since June, higher than the Briefing.com consensus of 253K, and higher than the prior reading of 251K. Continuing jobless claims rose to 2081K from 2043K
Initial claims have been below 300K for 91 consecutive weeks, the longest streak since 1970, but they are down for secular as well as cyclical factors that have little to do with the health of the economy. The two big ones are reduced support for the unemployed at the state level and new filing technologyThe Atlanta Fed's GDPNow model forecast for Q4 real U.S. GDP growth rose to 2.9% from 2.4% on WednesdayCommodities:
WTI crude: +2.99% to $50.92/bbl.Gold: unch at $1,170.8/troy oz.Copper: +0.06% to $2.6345/lb.Currencies:
EUR/USD: +0.49% to 1.0645USD/JPY: -0.27% to 114.14Data out Friday:November Employment Situation Report (08:30 ET)Fed Governor Tarullo (FOMC voter) (12:30 ET)