The Week in Review
The Week Ahead
- Treasuries lost ground this week as the Federal Reserve signaled it would remain 'patient' as to the course of future rate hikes.
- The Bank of Japan kept policy unchanged and hinted inflation could slow to 1% into March as a result of the drop in oil prices.
- Reports out Friday indicated Europe's periphery could bear the biggest burden of any QE risk should the ECB take that route.
- Russia's ruble saw a volatile five days as the currency plunged to a record low near 79.50 before ending the week little changed near 58.18.
- U.S. economic data was largely disappointing as Empire Manufacturing (-3.6 actual v. 14.0 expected), housing starts (1028K actual v. 1035K expected), building permits (1035K actual v. 1060K expected), CPI (-0.3% actual v. -0.1% expected), and Philly Fed (24.5 actual v. 26.0 expected) all missed the mark.
- Only industrial production (1.3% actual v. 0.7% expected), capacity utilization (80.1% actual v. 79.3% expected), and leading indicators (0.6% actual v. 0.5% expected) topped estimates.
- Up front, the 2Y tacked on +9bps to 0.638%. The yield ended just shy of its highest close since April 2011.
- The 5Y jumped +12bps to 1.654%. The yield finished on the 100 and 200 dma, and is attempting a run at 1.700% resistance.
- The 10Y climbed +9bps to 2.176%. The benchmark yield flirted with the key 2.220%, but was unable to finish the week above the level.
- Outperformance at the long end saw the 2Y tick up just +2bps to 2.774%. The ability to hold 2.700% will be critical for the bear case.
- Little change along the curve saw the 2-10-yr spread hold near 154bps.
- Monday's data is limited to existing home sales (10). Treasury will auction $27B 2Y notes.
- Tuesday's data is heavy as durable orders, GDP - Third Estimate (8:30), FHFA Housing Price Index (9), Michigan Sentiment - Final (9:55), personal income and spending, PCE Prices - Core, and new home sales (10) cross the wires. Treasury will hold a $35B 5Y note auction.
- Data concludes for the week on Wednesday with the weekly MBA Mortgage Index (7) and initial and continuing claims (8:30). U.S. equity markets will close at 1pm ET and the U.S. Treasury market will finish at 2pm ET for Christmas Eve. Treasury will auction $29B 7Y notes.
- Markets are closed Thursday in observance of Christmas Day.
- There is no data on Friday.
Dollar Hits Best Levels Since April 2006:
- The Dollar Index presses session highs near 89.60 and remains on track for its best close since April 2006.
- The 200 mma provides a headwind near 89.90.
- EURUSD is -60 pips @ 1.2225 as trade flushes to levels last seen in August 2012. The single currency has come under pressure during today's session after a report surfaced suggesting the weaker countries from the region could shoulder the largest burden if a QE-type program is implemented. Key support in the 1.2000/1.2200 area is guarded by the 200 mma.
- GBPUSD is -45 pips @ 1.5625 as trade continues to test 15-month lows. Sterling was unable to gain traction in overnight trade despite the strongest CBI Realized Sales print in over 25 years, but did manage to reclaim the flat line in early U.S. action. However, the late-morning rally in the greenback pushed the pound back into negative territory. The 1.5600 area is key.
- USDCHF is +40 pips @ .9835 as trade readies for its best close in more than two years. Action has recoupled with the euro after briefly decoupling in response to yesterday's decision by the Swiss National Bank to initiate a negative rate policy. EURCHF was little changed near 1.2030.
- USDJPY is +70 pips @ 119.55. Today's bid has the pair testing resistance in the area, and comes after the Bank of Japan held policy unchanged but warned inflation could slide to 1% into March as a result of the drop in oil prices.
- AUDUSD is -30 pips @ .8130 as trade presses back onto 54-month lows. Support in the .8100 remains under scrutiny.
- USDCAD is +40 pips @ 1.1615 as trade ticks back up towards its best levels since July 2009. The pair drifted little changed into this morning's mixed core CPI (-0.2% MoM actual v. +0.1% expected) and core retail sales (0.2% actual v. 0.2% expected) data before grinding higher over the remainder of the session.
Afternoon Update: 2Y unch @ 99 23/32...3Y unch @ 99 23/32...5Y +02/32 @ 99 09/32...7Y +05/32 @ 99 10/32...10Y +11/32 @ 100 20/32...30Y +30/32 @ 104 14/32...EURUSD -45 pips @ 1.2240...GBPUSD -50 pips @ 1.5620...USDJPY +65 pips @ 119.50...USDCHF +30 pips @ .9825...AUDUSD -35 pips @ .8125...USDCAD +45 pips @ 1.1320
Treasuries Tick to Highs
- Treasuries press session highs as a persistent bid has developed over the course of the morning.
- Early buying is weighing heaviest on the 10Y, which is -3bps @ 2.174%. The benchmark yield as given back all of yesterday's advance after struggling near the closely watched 2.200% level.
- Action is likely to get sloppy into the afternoon as today is a quadruple witching options expiration.
- Buying has flattened the curve with the 2-10-yr spread trading 154bps.
- Precious metals are bid with gold +$2 @ $1197 and silver +$0.11 @ $16.04.
Dollar Remains Strong:
The Dollar Index
remains firmly in the 89 area post-FOMC. The DXY hit 89.46 falling just short of the multi-year high of 89.55 set back on December 8. Volume is starting to dry up as wee head towards the holiday season. It is relatively quiet on the calendar next week with notables being: existing home sales (Mon); durable orders, income and spending (Tue) and claims (Wed).
- The euro hit a fresh multi-year low this morning as it fell to 1.2233. Earlier, there were reports that in order to start sovereign bond buying some countries may be forced to hold more capital at their respective central banks to cover losses. This would mitigate some of the risk for Germany and make a QE program more palpable to citizens.
- The pound is under modest selling pressure but continues to hold the 1.5600 area. Public sector net borrowing was higher than expected.
- The yen has slipped back into the 119 area as it gives up some recent gains. Last night, the Bank of Japan met but made no changes to its current stimulus plan. There were rumors that the BoJ would increase its JPY80 trl asset purchase program by another JPY3.5 trl, but that never materialized.
Treasuries Mixed in Choppy Trade:
- Treasuries trade in a mixed fashion as a choppy trade has taken hold amid a lack of tradable news and data.
- A modest bid in the belly has the 5Y -2bps @ 1.639%. The yield continues to flirt with both the 100 and 200 dma at the level.
- A -1bp drop has the 10Y probing the 2.200% level. That area remains in focus as Jeff Gundlach had previously suggested it would be a low watermark for the yield.
- Light selling at the long end has the 30Y +0.8bps @ 2.820%. The 2.900% area is home to the first level of resistance.
- A slightly steeper curve remains as the 2-10-yr spread trades 157.5bps.
- Precious metals are little changed with gold and silver @ $1196 and $15.93, respectively.
- Yields are mixed across Europe.
- Reports crossing the wires this morning suggest the largest burden of QE risk could be placed on the weaker countries.
- German Bunds hold small gains after GfK Consumer Climate (9.0 actual v. 8.9 expected, 8.7 previous) slightly outpaced estimates. A -1bp drop has the 10Y @ 0.600% and flirting with all-time lows.
- UK Gilts are lower following today's better than expected data. Public sector net borrowing (GBP13.4 bln actual v. GBP14.8 bln expected) beat expectations, but the real story was CBI Realized Sales surging to 61 (30 expected, 27 previous), its best in more than 25 years. Light selling has the 10Y +2bps @ 1.890%.
- French OATs trade flat. The unchanged trade has the benchmark 10Y stuck at 0.890%.
- Greek Government Bonds are sharply higher as money continues to pour in despite Wednesday's first round of voting failing to produce a new president. Today's bid has the 10Y lower by -25bps @ 8.43%, and down -77bps from Wednesday's high print of 9.20%.
- The buying in Greece has supported the debt of Italy and Spain. Italy's 10Y is off -1bp @ 1.950% while an early bid pushed Spain's 10Y below 1.700% for the first time ever. Currently the Spanish 10Y is -4bps @ 1.710%.
Euro Threatens December's Lows:
- The Dollar Index has pulled back from session highs, but continues to hold small gains near 89.40.
- Trade came within a penny of its best print Since April 2006 before sellers emerged.
- The 200 mma (89.90) remains a significant hurdle.
- EURUSD is -15 pips @ 1.2270 as action presses the December lows. The single currency has been in a steady decline since the slightly better than expected GfK German Consumer Climate (9.0 actual v. 8.9 expected, 8.7 previous) crossed the wires as reports out suggested the weaker countries could share a heavier burden of QE risk. The December lows at 1.2250 remain in focus.
- GBPUSD is -50 pips @ 1.5620 as trade presses its worst levels of the day. Today's weakness comes despite public sector net borrowing (GBP13.4 bln actual v. GBP14.8 bln expected) topping estimates and CBI Realized Sales surging to 61 (30 expected, 27 previous), the highest in more than 25 years. The December lows near 1.5550 remain under close watch.
- USDCHF is +20 pips @ .9815 as buyers remain in control for a third session. Today's bid has the pair threatening yesterday's two-year high of .9850 that came after the Swiss National Bank introduced a negative interest rate policy. EURCHF trades flat @ 1.2035.
- USDJPY is +20 pips @ .9815 as trade firms after the Bank of Japan kept policy on hold and suggested inflation could slow to 1% into March because of the decline in energy prices. Minor resistance at 119.70 is all that stands in the way of a retest of the December highs near 122.00.
- AUDUSD is +10 pips @ .8175 as action firms off 54-month lows. A quiet session for news and data down under has kept the hard currency in a tight 40 pip range. USDCNY edged up 0.1% to 6.2202, best since June.
- USDCAD is +25 pips @ 1.1600 as action presses its best levels of the session. The pair will be in focus this morning as CPI and retail sales figures are set to cross the wires.
Treasuries Trade Mixed:
- Treasuries trade mixed ahead of the cash open.
- Overnight ranges were a bit wider than usual, expanding to 4bps across most of the curve.
- Up front, the 2Y is -1.9bps @ 0.614%. Action has carved out a range between 0.550% and 0.600% for much of December.
- In the belly, the 5Y is -2bps @ 1.639%. Current levels remain in focus as both the 100 and 200 dma lurk in the vicinity.
- The 10Y trades -0.5bps @ 2.199%. The benchmark yield is looking to hold the key 2.200% level that bond guru Jeff Gundlach had fingered as a potential bottom for 2014.
- Light selling at the long end has the 30Y +1.6bps @ 2.828%. Resistance in the 2.900% area remains under close watch.
- A steeper curve persists as the 2-10-yr spread trades 158.5bps.
- Precious metals hold small gains with gold +$3 @ $1198 and silver +$0.02 @ $15.95.
- Data: None.
Treasuries See Second Day of Selling:
- Treasuries finished off their worst levels, but still booked modest losses as sellers remained in control for a second session.
- The complex held small losses into the cash open and put in fresh lows as initial (289K actual v. 292K expected) and continuing (2373K actual v. 2510K expected) claims outpaced expectations.
- Selling pushed maturities to new lows after the mixed Philly Fed (24.5 actual v. 26.0 expected) and leading indicators (+0.6% actual v. +0.5% expected) data before drifting in a tight range over the remainder of the session.
- Up front, the 2Y added +4.8bps to 0.633% and finished just shy of its best close since April 2003.
- In the belly, the 5Y tacked on +4.7bps to 1.659%. The yield reclaimed both its 100 and 200 dma and ended at a two-week high.
- The 10Y rallied +5.6bps to 2.204%. The benchmark yield reclaimed the important 2.200% level that was early fingered as a potential bottom by bond guru Jeff Gundlach.
- Selling at the long end ran the 30Y up +6bps to 2.812%. A test of resistance in the 2.900% area is looking possible.
- Curve steepening continued as the 2-10-yr spread widened to 157bps.
- Precious metals ended mixed as gold gained +$3 to $1197 and silver slipped -$0.01 to $15.91.
- Data: None.
- Fed Speak: Chicago's Evans will make opening remarks at the Second Annual Summit on Regional Competiveness (10). Richmond's Lacker discusses the economy (12:30).
Dollar Flirts with Best Close Since March 2009:
- The Dollar Index holds slim gains as trade probes the 89.30 level and flirts with its best close since March 2009.
- The Index tested 88.90 in early action, but has spent almost the entire U.S. trade trapped between 89.20/89.40.
- EURUSD is -65 pips @ 1.2275 as trade contends with its worst finish since August 2012. Aiding today's decline was a disappointing German Ifo Business Climate survey as sellers remain in control after action over the past two days failed at the 50 dma. GfK German Consumer Climate is due out tomorrow.
- GBPUSD is +90 pips @ 1.5665 as action rallied off key support near 1.5600. Sterling was been boosted by this morning's strong retail sales figure, but remains stuck in the 1.5600/1.5800 range that has been in place over the past month. Britain's public sector net borrowing and CBI Realized Sales are scheduled for tomorrow.
- USDCHF is +75 pips @ .9805 as trade presses to its best level in over two years after the Swiss National Bank announced it would charge banks 25bps on their deposits. The announcement comes as the SNB attempts to get out in front of a potential announcement of QE-type program by the European Central Bank in early-2015.
- USDJPY is +20 pips @ 118.80 as trade remains on hold ahead of tonight's Bank of Japan policy meeting. Expectations are for nothing new to be announced at tonight's meeting; however, there has been some rumblings the government is in the process of putting together a stimulus package to support the economy.
- AUDUSD is +35 pips @ .8155 as action ticks off 54-month lows. The rebound in the hard currency comes despite further weakness in Chinese home prices, and is likely tied to action checking up on key support. Today marked just the third gain in sixteen sessions.
- USDCAD is -25 pips @ 1.1600 as trade continues to slide off its best levels since July 2009. The pair will be in focus tomorrow as Canada's CPI and retail sales will be released.