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Update: 2017-01-17 15:55:12 ET

Moving the Market
  • January Empire Manufacturing: Actual 6.5, Briefing.com consensus 8.3, Prior 9.0
  • New York Fed President Dudley (FOMC voter): Low risk that Fed will snuff out expansion is quite low because inflation is not a problem; dollar strength could put downward pressure on import prices; looser regulation on small U.S. banks would raise growth rate
  • Fed Governor Brainard (FOMC voter): Fed likely to hike rates faster if fiscal policy quickly eliminates labor market slack; full employment within reach; gradual rate hike path appropriate as long as inflation remains tame but fiscal policy could change that
  • San Francisco Fed President Williams (non-FOMC voter) (18:00 ET)

1/17/2017
3:18:38 ET
10-Year:+20/32 2.32    GNMAs:     EUR/USD:1.0705    USD/JPY:112.67   

Treasuries Advance as Markets Go Risk-Off

  • U.S. Treasuries logged sizable gains today as the Empire Manufacturing Index missed estimates and global equities traded lower. New York Fed President Dudley said this morning that recent strength in the U.S. dollar could help contain inflationary pressure in the U.S. but Fed Governor Brainard sounded slightly more hawkish than usual, saying that certain fiscal policy changes could cause a more-than-gradual pace of rate hikes. She also said that the U.S. is "within reach" of full employment. These remarks are quite in line with the thinking of many of her colleagues but she is known for being an uber-dove, probably forecasting only one rate hike in 2017 in December's dot plot. New York Fed presidents and Fed governors always vote on monetary policy decisions. Investors now look forward to Wednesday's release of December's CPI and industrial production data. The S&P 500 trades down 0.46% to 2,264.2 and the U.S. Dollar Index is down 0.80% to 100.37
  • Yield Check:
    • 2-yr: -4 bps to 1.15% 
    • 5-yr: -8 bps to 1.82% 
    • 10-yr: -7 bps to 2.32%
    • 30-yr: -6 bps to 2.93%
  • News:
    • The Empire Manufacturing Index fell to 6.5 for January from 9.0 in December, missing the Briefing.com consensus of 8.3. Both prices paid and prices received rose markedly
      • The new orders subindex fell seven points to 3.1
      • Shipments were unchanged at 7.3
      • New employees rose to -1.7
      • Prices paid jumped by 14 points to 36.1, the highest level since 2014
      • Prices received also rose by 14 points (to 17.6)
      • The capital expenditures subindex rose by four points to 25.2
    • New York Fed President William Dudley (FOMC voter) said this morning that the recent appreciation of the U.S. dollar would put downward pressure on imported prices and make it harder for domestic producers to get pricing power. He went on to say that "inflation is simply not a problem"
      • Dudley said that the current expansion will continue in the next few years and that pressure on labor resources is increasing "quite slowly"
    • Fed Governor Lael Brainard (FOMC voter) said this morning that full employment is "within reach," sounding a bit more hawkish than her usual self. She went on to say that a gradual rate hike path will be appropriate as long as inflation pressures remain tame and as long as fiscal policy changes don't juice the economy too much
      • Brainard also said that a fiscally-driven growth acceleration could induce the Fed to end balance sheet reinvestment sooner
  • Commodities:
    • WTI crude: +0.17% to $52.46/bbl.
    • Gold: +1.60% to $1,215.3/troy oz.
    • Copper: -2.53% to $2.622/lb.
  • Currencies:
    • EUR/USD: +0.85% to 1.0705
    • USD/JPY: -1.11% to 112.67
  • Data out Wednesday:
    • MBA Mortgage Index for the week ending 1/14 (07:00 ET)
    • December CPI and Core CPI (08:30 ET)
    • December Industrial Production and Capacity Utilization (09:15 ET)
    • January NAHB Housing Market Index (10:00 ET)
    • January Fed Beige Book (14:00 ET)
    • November Net Long-Term TIC Flows (16:00 ET)
  • Fed Speakers:
    • Minneapolis Fed President Kashkari (FOMC voter) (10:00 ET)
    • Fed Chair Yellen (FOMC voter) (15:00 ET)

 
1/17/2017
2:14:07 ET
10-Year:+16/32 2.34    GNMAs:     EUR/USD:1.0710    USD/JPY:112.87   

Pound Jumps as Theresa May Outlines Brexit Strategy

  • The U.S. Dollar Index fell 0.73% to 100.44 today as the British pound surged following U.K. Prime Minister May's speech regarding her government's Brexit negotiation strategy. In her remarks, she said explicitly that the U.K. will leave the European Union's single market but that she will negotiate for a "bold and ambitious" trade relationship with the EU. May said that Parliament would vote on the final deal. The U.S. dollar's weakness today, losing ground to all of the majors, was also partly due to President-Elect Trump's negative remarks regarding the idea of destination-based cash flow tax over the long weekend. Such a tax could, according to some economists like Martin Feldstein, cause the dollar to appreciate by 20-25% to maintain a similar trade deficit while eliminating taxes on export revenue 
  • EUR/USD: +0.91% to 1.0710
    • The ZEW Institute's eurozone Economic Sentiment Index rose less than expected to 23.2 for January from 18.1 for December
    • In Germany, the ZEW Economic Sentiment Index also rose less than expected to 16.6 for January from 13.8 for December
      • The Current Conditions Index jumped by more than expected to 77.3 from 63.5
    • France's government budget deficit widened to EUR93.3 bln for November from EUR85.5 in October
  • GBP/USD: +2.95% to 1.2405
    • In the U.K., consumer price inflation rose to 1.6% y/y in December (0.5% m/m), exceeding both forecasts and November's 1.2% rate. December's reading was the highest since August 2014
      • The core CPI was up 1.6% y/y
    • The House Price Index grew by 6.7% y/y in November, accelerating from an upwardly revised 6.4% increase in October
  • USD/CHF: -0.84% to 1.0021
  • USD/JPY: -0.94% to 112.87
  • USD/CNY: -0.67% to 6.85
  • USD/BRL: -1.00% to 3.209 
  • USD/CAD: -0.92% to 1.3047
  • AUD/USD: +1.05% to 0.7558
    • In Australia, home loans grew by 0.9% m/m in November, meeting expectations and reversing October's 0.6% decline
    • New motor vehicle sales were up 0.3% m/m in December after declining by 0.6% in November
  • NZD/USD: 
    • New Zealand's NZIER Business Confidence Index rose to 28% for the fourth quarter, up from 26% in Q3
    • The GlobalDairyTradePrice Index rose 0.6% w/w after falling by 3.9% in the prior week's auction

 
1/17/2017
1:44:17 ET
10-Year:+13/32 2.35    GNMAs:     EUR/USD:1.0699    USD/JPY:113.03   

Corporate Spreads Narrow a Touch

  • U.S. Treasuries have settled down to sizeable gains in afternoon trading. WTI crude is up 1.01% to $52.90/bbl. and the U.S. Dollar Index is losing 0.70% to 100.47. The S&P 500 is off by 0.17% to 2,270.8 and gold is 1.45% higher at $1,213.5/troy oz. 
  • Corporate bond spreads are narrowing slightly today as debt markets shake off some risk-off action in global equity markets. Oil prices are higher as well and that is a net tailwind for corporate bonds, at least in the U.S.
  • British American Tobacco announced today that it will acquire the 57.8% of Reynolds that is does not already own for $49.4 bln
    • The deal led ratings agency Moody's to downtrade its credit rating of BAT from A3 to Baa2, just two notches above junk, because of the large increase in the company's debt burden and leverage
  • The 2nd Circuit Court of Appeals reversed a 2015 decision on a case involving bonds issued by Eductional Management Corporation. Today's ruling found that EDMC's 2011 out-of-court debt restructuring did not violate the U.S. Trust Indenture Act of 1939 "because the transactions did not formally amend the payment terms of the indenture that governed the notes". More from the FT
  • BofA ML Global Corporate Bond Index
    • OAS: -1 basis point to 128 basis points
    • Yield: 2.72%
    • 52-week high was 202 bps
    • 52-week low was 127 bps
  • BofA ML U.S. High Yield
    • OAS: -3 bps to 400 bps
    • Yield: 6.26%
    • 52-week high was 887 bps
    • 52-week low was 398 bps

 
1/17/2017
12:40:18 ET
10-Year:+13/32 2.35    GNMAs:     EUR/USD:1.0706    USD/JPY:112.97   

Junk Bond ETFs Lag

  • Treasuries are now extending their retreat from session highs as the S&P 500 has clawn back to a loss of just 0.21% at 2,269.6 and WTI crude adds 0.71% to $52.74/bbl. The U.S. Dollar Index is off by 0.76% to 100.41 and gold is up 1.41% to $1,213.10/troy oz.. The British pound is now up 2.69% to $1.2377 today on what looks like a reversal after capitulation on the part of sterling bears. The euro is also looking like it may have seen its worst levels for a while, now trading up 0.86% to $1.0704. We don't like selling higher prices in either of these currencies. While it is very difficult to quantify the value that investors get from political stability, there is little question that Trump's election has marked the end of a certain kind of consensus in Washington from the post-WWII era. While the transition away from trade liberalization may just be a moderation of sorts, it is also not clear how our trading partners will react. The eurozone has its issues, but ever since 2010, it was mostly indisputable that the eurozone had more political risk for investors than the United States. Political risks in the eurozone are also closely correlated with the risk of deflation there, which could eventually lead to a breakup of the currency union. With deflationary risk receding, there is an argument to be made that American's preference for a government by personality rather than a rules-based system is not good for the U.S. To the extent that the U.S. is an indispensable trading partner, the new government may even profit from taking an antagonistic stance towards other countries like Mexico and China. To the extent that the economic center of gravity has shifted towards Asia, some of the new administrations trade talk may backfire. Certainly with the U.S. Dollar Index over 100 and U.S. stocks outperforming eurozone equities for years, American investors looking to diversify away from some of this Anglo-Saxon shift away from free trade would not be selling into panic. The eurozone is also arguable in a much earlier stage of economic recovery with ample slack in periphery labor markets before monetary tightening becomes necessary. Of course, the wild card is that the U.S. government implements a destination-based cash flow tax and that could send the U.S. dollar up very sharply
  • In the ETF universe, the junk bond ETFs are lagging well behind the investment-grade corporate bond ETFs
  • Broad Bond Market ETFs
    • AGG (iShares Core U.S. Aggregate Bond ETF): +0.23% to $108.67
    • BNDX (Total International Bond ETF): +0.11% to $54.09
    • BND (Total Bond Market ETF): +0.22% to $81.23
    • BSV (Short-term Bond ETF): +0.09% to $79.67
  • Investment-Grade Corporate Debt ETFs
    • BKLN (PowerShares Senior Loan Portfolio): -0.01% to $25.36
    • CIU (iShares Intermediate Credit Bond ETF): +0.27% to $108.76
    • LQD (iShares iBoxx Investment Grade Corporate Bond ETF:  +0.31% to $118.14
    • VCIT: (Vanguard Intermediate-Term Corporate Bond ETF): +0.31% to $86.28
  • High-Yield Debt ETFs
    • HYG (iShares iBoxx $ High Yield Corporate Bond ETF): -0.13% to $87.20
    • JNK (SPDR Bloomberg Barclays High Yield Bond ETF): -0.07% to $36.75
  • Mortgage-Backed Securities ETFs
    • MBB (iShares MBS ETF): +0.15% to $106.68
  • Municipal Debt ETFs
    • MUB (iShares National Muni Bond ETF): +0.16% to $106.70
  • Treasury ETFs
    • IEF (7-10 Year Treasury Bond ETF): +0.36% to $105.77
    • TBT (Proshares Ultrashort 20+ Year Treasury Bond ETF): -1.27% to $38.81 
    • TLT (iShares 20+ Year Treasury Bond ETF): +0.57% to $122.00

 
1/17/2017
12:25:22 ET
10-Year:+13/32 2.351%    GNMAs:     EUR/USD:1.0700    USD/JPY:112.96   

Stronger Dollar Stoking Trade/Funding Concerns: The Dollar Index is under pressure following comments by President-elect Donald Trump's comments that the dollar is too high. It is notable that worries over the strong dollar have been an early focal point in some of the Global economy discussions. The January Empire Manufacturing survey also came a little light. The greenback was already in the midst of a pullback from the election rally so these headlines have helped weigh on the currency. The DXY is preparing to test the 100 psyche level.

  • The euro is in the midst of rallying back to test the 1.07 level. 1.07 is still holding up some resistance. The market is preparing for this week's ECB meeting with a focus on comments by the bank and President Mario Draghi around prices. Early this morning the latest German and Eurozone ZEW surveys both fell short of expectations. It is only one set of economic data points but markets will be watching to see if the trend of a weak Q1 that we witnessed the past three years continues.
  • The pound has rallied following comments from U.K. Prime Minister Theresa May on Brexit. Sterling kicked off the weak under tremendous selling pressure as it fell to 1.1980, its lowest level since the flash crash. But sterling was able to rally as Ms. May presented her outline for the rules of a Brexit. Ms. May is favoring a Hard Brexit as the desire to craft its own immigration policies and leave the European Court of Justice outweighed the perceived benefits of staying in a single market trade union. Ms. May also plans to leave the customs union in order to allow the U.K. to craft new trade deals with the EU and around the globe. Ms. May also stated that parliament would be included in the negotiations which will offset a potential headwind ruling by the country's top court.
  • The yen has pressed back to the 112 area as we see some risk off trade take hold. The yen is now trading at its highest level since November 30. This will set up as a key level as yen straddled this area in late November, early December before seeing its next leg higher.
  • The Chinese yuan is testing the 6.80 area for resistance. 6.78 marks the 2017 lows at the moment and will set up as a key support level. Comments from President-elect Trump hinting towards currency manipulation has likely led to a strengthening in the currency. This morning President Xi Jinping provided Opening Remarks at the World Economic Forum. He pressed on the desire to continue globalization and freeing up trade as he positions China to be at the fore front of these issues.

 
1/17/2017
11:43:09 ET
10-Year:+17/32 2.33    GNMAs:     EUR/USD:1.0708    USD/JPY:112.77   

Fed Watchers Put Yellen on Three Rate Hikes in 2017

  • Treasuries are holding below their session highs this morning as traders look ahead to Wednesday's releases of December consumer price index and industrial production data. The S&P 500 is down 0.23% to 2,269.5 and the U.S. Dollar Index is losing 0.81% at 100.36. WTI crude is up 0.48% to $52.62/bbl. and gold is holding up by 1.51% at $1,214.3/troy oz.
  • Bloomberg has an article today showing how last week's Fed speakers implicitly show that Fed Chair Yellen is among the Fed officials who forecast three 25-basis point rate hikes in 2017 in the December dot plot.Link here :
    • With only two dots for one hike, it is fairly simple to fill in St. Louis Fed President Bullard and Fed Governor Brainard as marking those dots. Brainard has been outspokenly dovish since the fall of 2015 and Bullard underwent a conversion from hawk to uber-dove a la former Minneapolis Fed President Kocherlakota back in June 2016
    • The Bloomberg piece says that Fed watchers are now putting Kashkari, Tarullo, Evans and Lockhart on two hikes
      • This reasoning is defensible because one, Tarullo has been an intellectual bedfellow of Lael Brainard's since she first questioned the Phillips Curve back in the fall of 2015
      • Two, the Minneapolis Fed did not request an increase in the discount rate in January, implying dovishness on Kashkari's part
      • Three, both Lockhart and Evans indicated last week that they would favor two hikes
    • So this very reasonable allocation of dots would put the Fed's leadership -- Yellen, Fischer, and Dudley -- all at three dots and mean that only four FOMC voters predicted either one or two rate hikes in 2017 (Brainard, Tarullo, Kashkari, and Evans). This logic indicates that, given that the economy and fiscal policy develop in the way that Fed policymakers predict (a big "if"), we will see three hikes in 2017
  • This is a piece from MarketWatch on the risks to general obligation municipal bonds in 2017
  • Yield Check:
    • 2-yr: -5 bps to 1.15%
    • 5-yr: -7 bps to 1.83%
    • 10-yr: -7 bps to 2.33%
    • 30-yr: -5 bps to 2.94%

 
1/17/2017
11:00:19 ET
10-Year:+16/32 2.34    GNMAs:     EUR/USD:1.0694    USD/JPY:113.02   

Traders Look Ahead to Wednesday's CPI Report

  • U.S. Treasuries are still of their session highs following some more-hawkish-than-usual remarks from Fed Governor Lael Brainard. The S&P 500 is trading down just 0.16% to 2,271 despite a lot of talk of risk aversion this morning and the index of large-cap U.S. stocks found support at its 21-day moving average of 2,264.7 this morning (the actual low for the index was 2,265.5). The U.S. Dollar Index is down 0.69% to 100.48, which should be good for U.S. equities. Gold is up 1.46% to $1,213.6/troy oz. and WTI crude is adding 0.57% to $52.67/bbl.
  • Fed Governor Brainard, along with her remarks that we wrote about in the 10:19 comment, also said that a fiscally-driven growth acceleration could induce the Fed to end balance sheet reinvestment sooner
  • Despite some very violent rallying behavior this morning, the 10-year yield held its 23.6% Fibonacci retracement at 2.318% and is back almost back to its 50-day moving average (2.341%) (see chart below)
  • Yield Check:
    • 2-yr: -3 bps to 1.16%
    • 5-yr: -6 bps to 1.83%
    • 10-yr: -6 bps to 2.33%
    • 30-yr: -5 bps to 2.94%
  • 10-Year Treasury Yield (Daily):

 
1/17/2017
10:19:41 ET
10-Year:+17/32 2.33    GNMAs:     EUR/USD:1.0699    USD/JPY:113.11   

Brainard Says U.S. "Within Reach" of Full Employment

  • U.S. Treasuries have pulled back from very strong gains this morning as Fed Govenor Brainard spoke publicly and the &P 500 trades down just 0.21% at 2,269.8 (intraday low 2,265.5). The U.S. Dollar Index is down 0.76% to 100.43 after trading as high as 103.82 on the first trading day of 2017. Having ventured as low as 96 on election night, one could now say that the dollar's post-election rally is almost halfway unwound. Trump said over the weekend that he "doesn't love" the border tax idea and that should be adding to the selling pressure on the greenback. WTI crude is up 1.20% to $53.00/bbl. and gold is adding 1.43% at $1,213.3/troy oz.
  • Fed Governor Lael Brainard said this morning full employment is "within reach," sounding a bit more hawkish than her usual self. She went on to say that a gradual rate hike path will be appropriate as long as inflation pressures remain tame and as long as fiscal policy changes don't juice the economy too much
  • Here is a piece from Brookings about the destination-based cash flow tax (DBCFT)
  • Yield Check:
    • 2-yr: -6 bps to 1.14%
    • 5-yr: -8 bps to 1.82%
    • 10-yr: -7 bps to 2.33%
    • 30-yr -5 bps to 2.94%

 
1/17/2017
9:22:34 ET
10-Year:+23/32 2.31    GNMAs:     EUR/USD:1.0702    USD/JPY:112.99   

Treasuries Move to Highs

  • U.S. Treasuries are trading at or near their overnight highs at the moment following some dovish remarks from New York Fed President William Dudley (NY Fed governors always vote). While Dudley has been on the dovish side of the committee for the past couple of years, the voting status this year of Chicago Fed President Evans and Minneapolis Fed President Kashkari likely puts Dudley closer to the center of the voting members on the dove/hawk scale. Fed Governors Brainard and Tarullo are also generally to the dovish side of Dudley
    • Dudley said this morning that the recent appreciation of the U.S. dollar would put downward pressure on imported prices and make it harder for domestic producers to get pricing power
    • He went on to say that "inflation is simply not a problem"
    • Dudley said that the current expansion will continue in the next few years and that pressure on labor resources is increasing "quite slowly"
  • The U.S. Dollar Index is down 0.74% to 100.43 as the British pound rallies 2.56% to $1.2360
    • U.S. President-elect Trump told the Wall Street Journal over the weekend, "Anytime I hear border adjustment, I don't love it." The possibility of a destination-based cash flow tax may have contributed to a fair amount of the appreciation in the U.S. dollar since the November 8 election. The next question is whether House Republicans would continue with the DBCFT idea even if Trump opposes it and then, whether Trump would sign such a corporate tax reform into law
  • The S&P 500 is set to open down 0.29% to 2,268.4 and gold is up 1.66% to $1,216.10/troy oz.
  • WTI crude is adding 2.08% at $53.46/bbl.
  • Yield Check:
    • 2-yr: -5 bps to 1.14%
    • 5-yr: -9 bps to 1.81%
    • 10-yr: -8 bps to 2.31%
    • 30-yr: -7 bps to 2.92%

 
1/17/2017
8:50:58 ET
10-Year:+19/32 2.32    GNMAs:     EUR/USD:1.0682    USD/JPY:113.25   

Treasuries Rally Back Towards Highs

  • U.S. Treasuries have settled in this morning with large gains after a very volatile overnight session. The Empire Manufacturing Index fell to 6.5 for January from 9.0 in December, missing the Briefing.com consensus of 8.3. Both prices paid and prices received rose markedly
    • The new orders subindex fell seven points to 3.1
    • Shipments were unchanged at 7.3
    • New employees rose to -1.7
    • The average workweek dipped to -4.2
    • Prices paid jumped by 14 points to 36.1, the highest level since 2014
    • Prices received also rose by 14 points (to 17.6)
    • Future business conditions were unchanged at a multi-year high of 49.7
    • The capital expenditures subindex rose by four points to 25.2
    • Full report
  • President-Elect Trump downplayed the idea of a destination-based cash flow tax over the weekend. Martin Feldstein said last week that such a reform of the corporate tax system could cause the U.S. dollar to appreciate by 20-25%
  • The S&P 500 is set to open down 0.26% to 2,268.9 and the U.S. Dollar Index is down 0.54% to 100.63
  • WTI crude is adding 1.45% to $53.13/bbl. and gold is up 1.55% to $1,214.7/troy oz.
  • Yield Check:
    • 2-yr: -6 bps to 1.13%
    • 5-yr: -8 bps to 1.82%
    • 10-yr: -7 bps to 2.32%
    • 30-yr: -7 bps to 2.92%

 
1/17/2017
8:24:27 ET
10-Year:+16/32 2.34    GNMAs:     EUR/USD:1.0684    USD/JPY:113.41   

European Bonds Rally

  • European sovereign debt yields are moving lower this morning as U.K. Prime Minister May's speech about her Brexit strategy has sent the British pound to its largest gain since 2008 (+2.23% to $1.2320). Consumer price inflation in the U.K. ran hotter than expected in December (1.6% y/y) and it appears that the U.K.'s departure from the EU's single market has already been priced in by cable traders. In Germany, the ZEW Insitute's index of economic sentiment missed forecasts but the Current Conditions Index rose more than expected. The European Central Bank's Governing Council announces its next rate decision on Thursday. The council is widely expected to maintain monetary policy on its current course
  • ECB Governing Council member Ewald Nowotny said today that rising energy prices may eventually move core inflation higher in the eurozone
  • New Issuance:
    • Germany sold EUR4.03 bln of 2-year Schatz at an average yield of -0.75% with a bid-to-cover ratio of 1.26
      • December 7's Schatz auction drew a bid-to-cover of 1.81 so by that measure, demand was much weaker this month
  • European Economic Data:
    • In the U.K., consumer price inflation rose to 1.6% y/y in December (0.5% m/m), exceeding both forecasts and November's 1.2% rate. December's reading was the highest since August 2014
      • The core CPI was up 1.6% y/y
      • The House Price Index grew by 6.7% y/y in November, accelerating from an upwardly revised 6.4% increase in October
    • The ZEW Institute's eurozone Economic Sentiment Index rose less than expected to 23.2 for January from 18.1 for December
    • In Germany, the ZEW Economic Sentiment Index also rose less than expected to 16.6 for January from 13.8 for December
      • The Current Conditions Index jumped by more than expected to 77.3 from 63.5
    • France's government budget deficit widened to EUR93.3 bln for November from EUR85.5 in October
  • European Yields:
    • France, 10-yr OAT: -4 bps to 0.76%
    • Germany, 10-yr Bund: -4 bps to 0.30% 
    • Greece, 10-yr note: +4 bps to 6.98% 
    • Italy, 10-yr BTP:  -2 bps to 1.88%
    • Portugal, 10-yr PGB: -5 bps to 3.78%
    • Spain, 10-yr ODE: -2 bps to 1.38%
    • U.K., 10-yr Gilt: -1 bp to 1.31%

 
1/17/2017
7:48:55 ET
10-Year:+14/32 2.34    GNMAs:     EUR/USD:1.0705    USD/JPY:113.35   

Treasuries Jump on Risk Aversion Amid Dollar Weakness

  • U.S. Treasuries are moving sharply higher this morning as global markets trade in risk-off mode and the U.S. Dollar Index falls 0.62% to 100.55. President-Elect Trump said that the U.S. dollar was too strong over the weekend and U.K. Prime Minister Theresa May gave a speech this morning about her government's Brexit plans, saying that it would not try to remain in the European Union's single market. The British pound is up 2.25% to $1.2322 in a class "sell the rumor, buy the fact" dynamic, but sterling bulls are also getting help from faster-than-expected CPI growth in December. Chinese stocks have come under heavy selling pressure over the past week as the burden of financial adjustment for the Middle Kingdom has begun to fall on share prices instead of the renminbi. The Shanghai Composite did manage a gain of 0.17% to 3,108 today. WTI crude is trading up 1.51% to $53.16/bbl. and the S&P 500 is set to open down 0.16% to 2,271.1 although futures saw much steeper losses overnight. Gold is up 1.42% to $1,213.2/troy oz. 
  • Yield Check:
    • 2-yr: -3 bps to 1.6%
    • 5-yr: -5 bps to 1.85%
    • 10-yr: -6 bps to 2.34%
    • 30-yr: -5 bps to 2.94%
  • International News:
    • In Australia, home loans grew by 0.9% m/m in November, meeting expectations and reversing October's 0.6% decline
      • New motor vehicle sales were up 0.3% m/m in December after declining by 0.6% in November
    • New Zealand's NZIER Business Confidence Index rose to 28% for the fourth quarter, up from 26% in Q3
    • In the U.K., consumer price inflation rose to 1.6% y/y in December (0.5% m/m), exceeding both forecasts and November's 1.2% rate. December's reading was the highest since August 2014
      • The core CPI was up 1.6% y/y
      • The House Price Index grew by 6.7% y/y in November, accelerating from an upwardly revised 6.4% increase in October
    • The ZEW Institute's eurozone Economic Sentiment Index rose less than expected to 23.2 for January from 18.1 for December
    • In Germany, the ZEW Economic Sentiment Index also rose less than expected to 16.6 for January from 13.8 for December
      • The Current Conditions Index jumped by more than expected to 77.3 from 63.5
    • France's government budget deficit widened to EUR93.3 bln for November from EUR85.5 in October
  • Data Out Today:
    • January Empire Manufacturing (08:30 ET)
  • Fed Speakers:
    • New York Fed President Dudley (FOMC voter) (08:45 ET)
    • Fed Governor Brainard (FOMC voter) (10:00 ET)
    • San Francisco Fed President Williams (non-FOMC voter) (18:00 ET)

 
1/13/2017
3:25:54 ET
10-Year:-8/32 2.39    GNMAs:     EUR/USD:1.0648    USD/JPY:114.51   

Treasuries Drop but Mitigate Losses

  • U.S. Treasuries lost significant ground this morning after the release of U.S. PPI and retail sales data for December but rallied for the rest of the day to end well above their session lows. Retail sales excluding automobiles missed estimates in December despite improving economic sentiment, but the producer price index grew faster than expected and neither piece of news did much to disrupt the positive trend of sentiment since the November 8 election. The Atlanta Fed's Q4 U.S. real GDP growth estimate was revised down to 2.8% and the New York Fed's estimate for Q1 is just 1.9%. Canadian ratings agency DBRS downgraded Italy's sovereign credit rating to BBB, outlook stable from A, outlook negative. The S&P 500 is up 0.16% to 2,274.1 and the U.S. Dollar Index is down 0.17% to 101.18 
  • Yield Check:
    • 2-yr: +2 bps to 1.20%
    • 5-yr: +3 bps to 1.90% 
    • 10-yr: +2 bps to 2.39% 
    • 30-yr: +2 bps to 2.98%
  • News:
    • U.S. retail sales rose by 0.6% m/m in December, just missing the Briefing.com consensus for 0.7% growth. November's change was +0.1%
      • Retail sales excluding automobiles were up just 0.2% m/m, missing the Briefing.com consensus of 0.6%. November also saw a 0.2% increase in retail sales ex-auto
      • Retail sales excluding autos and gas grew at the slowest year-on-year pace since February 2014
    • The producer price index climbed 0.3% m/m in December, in line with the Briefing.com consensus. November's increase was 0.4%
      • The core PPI, which strips out food and energy prices, increased by 0.2% in December, exceeding the Briefing.com consensus for 0.1% growth. The core PPI jumped by 0.4% m/m in November
      • The key takeaway from the report is that higher energy prices are driving up producer prices
    • U.S. business inventories unexpectedly fell by 0.1% m/m in November, falling well short of the Briefing.com consensus for growth of 0.6%. October saw a dip of 0.2%
      • The key takeaway from the report is that business inventories continue to remain at an elevated level relative to sales, which will weigh on pricing power for firms
    • Michigan Sentiment fell to 98.1 for January from 98.2 for December, missing the Briefing.com consensus for an increase to 98.5
      • Long-term inflation expectations rebounded to 2.5%
    • The New York Fed's GDP Nowcast for Q4 real U.S. GDP growth is 1.9%, down from the previous estimate of 2.0%, and for Q1 2017, the estimate is 2.1%
    • The Atlanta Fed revised its GDPNow model forecast for Q4 real U.S. GDP growth down to 2.8% from 2.9% on January 10

  • Commodities:
    • WTI crude: -0.98% to $52.49/bbl.
    • Gold: -0.13% to $1,198.2/troy oz.
    • Copper: +0.71% to $2.69/lb.
  • Currencies:
    • EUR/USD: +0.33% to 1.0648
    • USD/JPY: -0.30% to 114.51
  • Week Ahead:
    • Monday: (markets closed for MLK holiday)
    • Tuesday: January Empire Manufacturing (08:30 ET); New York Fed President Dudley (FOMC voter) (08:45 ET); Fed Governor Brainard (FOMC voter) (10:00 ET); San Francisco Fed President William (non-FOMC voter) (18:00 ET)
    • Wednesday: MBA Mortgage Index for the week ending 1/14 (07:00 ET); December CPI and Core CPI (08:30 ET); December Industrial Production and Capacity Utilization (09:15 ET); January NAHB Housing Market Index (10:00 ET); Minneapolis Fed President Kashkari (FOMC voter) (10:00 ET); January Fed Beige Book (14:00 ET); Fed Chair Yellen (FOMC voter) (15:00 ET); November Net Long-Term TIC Flows (16:00 ET)
    • Thursday: Initial Jobless Claims for the week ending 1/14 and Continuing Jobless Claims for the week ending 1/7 (08:30 ET); December Housing Starts and Building Permits (08:30 ET); January Philadelphia Fed (08:30 ET); San Francisco Fed President Williams (non-FOMC voter) (10:00 ET); Natural Gas Inventories for the week ending 1/14 (10:30 ET); Crude Inventories for the week ending 1/14 (11:00 ET): $13 bln 10-year TIPS auction (results at 13:00 ET); Fed Chair Yellen (FOMC voter) (20:00 ET)
    • Friday: Philadelphia Fed President Harker (FOMC voter) (09:00 ET); San Francisco Fed President Williams (non-FOMC voter) (13:00 ET)