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Update: 2016-10-20 15:55:15 ET

Moving the Market

European Central Bank maintains policy stance

Better-than-expected data: October Philadelphia Fed (9.7; consensus 5.5), September Existing Home Sales (5.47 million; consensus 5.30 million)

Below-consensus data: Initial Claims (260K; consensus 249K) [Continuing Claims increase to 2.057 million from 2.046 million]

In-line data: September Leading Indicators (+0.2%)

3:05:52 ET
10-Year:UNCH 1.746    GNMAs:     EUR/USD:1.0927    USD/JPY:103.93   

Treasuries Respect Narrow Range

  • The Treasury market endured a quiet session on Thursday, which took place alongside a similar affair in equities. The benchmark 10-yr note set a session low, followed by a rally to a high in morning action, but intraday backtracking off today's high leaves the security on track to close just above yesterday's settlement. FOMC Vice Chair William Dudley spoke last evening and once again this morning. Mr. Dudley said he expects a rate hike this year during yesterday's remarks while today's comments focused on bank regulation. Staying on the central bank theme, the European Central Bank made no changes to its policy stance and President Mario Draghi maneuvered through his press conference without triggering any big moves in the market. He reminded that interest rates will remain low long after the end of QE and that discussion of tapering or extending the program is premature. The current purchase program is scheduled to run until March 2017.
  • Yield Check:
    • 2-yr: +2 bps to 0.82%
    • 5-yr: +1 bp to 1.24%
    • 10-yr: UNCH at 1.75%
    • 30-yr: -1 bp to 2.50%
  • News:
    • Initial jobless claims jumped 13,000 to 260,000 ( consensus 249,000) for the week ending October 15. Continuing claims for the week ending October 8 rose by 7,000 to 2.057 million.
    • The Philadelphia Fed Index dipped from 12.8 in September to 9.7 in October ( consensus 5.5).
    • Existing home sales increased 3.2% to a seasonally adjusted annual rate of 5.47 million in September from a downwardly revised 5.30 million (from 5.33 million) in August. The uptick in September broke a string of monthly sales declines registered in July and August.
    • The Conference Board's Leading Economic Index (LEI) increased 0.2% in September, as expected, rebounding from an unrevised 0.2% decline in August.
  • Commodities:
    • WTI Crude: -2.2% to 51/64/bbl
    • Gold: -0.2% to $1267.70/ozt
    • Silver: -0.6% to $17.56/ozt
    • Copper: UNCH at $2.10/lb
  • Currencies:
    • EUR/USD: -0.4% to 1.0926
    • USD/JPY: +0.5% to 103.97
  • No Data or Auctions Scheduled for Friday
  • Fed Speakers
    • Daniel Tarullo (10:15 ET) (FOMC voter)
    • John Williams (14:30 ET)

1:42:25 ET
10-Year:-1/32 1.750    GNMAs:     EUR/USD:1.0937    USD/JPY:103.97   

Short End Slips, Long End Holds

  • U.S. Treasuries have continued drifting inside narrow ranges. The largest move has taken place upfront where the 2-yr note sits on its low, pushing up its yield two basis points to 0.82%, near Tuesday's high. Farther out, the 10-yr note is back to unchanged (1.75%) while the 30-yr bond holds a slim gain. The entire complex inched lower after a $5 billion 30-yr TIPS reopening, which drew a high yield of 0.666%.
  • Yield Check:
    • 2-yr: +2 bps to 0.82%
    • 5-yr: +1 bp to 1.24%
    • 10-yr: UNCH at 1.75%
    • 30-yr: -1 bp to 2.50%

1:06:09 ET
10-Year:+1/32 1.741    GNMAs:     EUR/USD:1.0943    USD/JPY:103.95   

TIPS Auction Results

  • $5 bln 30-year TIPS reopening
    • High yield: 0.666% (previous 0.905%)
    • Bid-to-cover: 2.28 (previous 2.69)
    • Indirect bid: 69% (previous 77%)
    • Direct bid: 9% (previous 0%)

12:55:36 ET
10-Year:+02/32 1.743%    GNMAs:     EUR/USD:1.0940    USD/JPY:103.95   

ECB Looking at December Staff Projections: The Dollar Index rallied to a fresh 7-month high, hitting 98.40 before seeing a small pullback. The DXY has been in a firm upward channel since Jackson Hole and that move has accelerated with a break above the 200-sma on October 4. The greenback continues to get bid ahead of a potential rate hike. 98 had held resistance over the last week but we saw the DXY break above that level following ECB President Mario Draghi's press conference. Economic data from this morning remained steady with Claims, Existing Home Sales relatively in line. Philadelphia Fed beat expectations and has helped offset some of Monday's Empire miss. None of this will deter the Fed from moving in its next couple of meetings.

  • The euro has broken below the key 1.0950 level we have been discussing. The ECB met today and left its rates unchanged as widely expected. The key was the press conference held by Mario Draghi. Markets were looking for any hint of a tapering process at the ECB. Mr. Draghi reiterated that the central bank would continue to purchase assets at a rate of EUR 80 bln a month through March 2017 or for as long as needed. But what gave the market some pause were comments that the ECB would review the updated staff projections and see if any changes needed to be made. In addition he noted a pick up in inflation (due largely to favorable comps in the energy space) as well as a steady recovery. This led to some belief that the ECB could indeed taper. That would not necessarily explain the move lower in the euro. It may suggest that the market is nervous the ECB could remove stimulus too early. It will certainly be worth watch in the coming weeks. As for now the single currency is in no man's land with little support if it is unable to regain the 1.0950 level.
  • The pound is holding in this 1.22-1.23 area. Sterling came under pressure at 8:35am as comments from PM Theresa May crossed wires and suggested she was prepared for a hard fight with the EU. But sterling was able to stabilize at the 1.22190 area and has been able to regain some of its losses to tick up 50 pips from the lows.
  • One of the more interesting moves of the day came in the yen. Equities were suggesting a risk off trade but the yen continued to slide lower. Perhaps it was the strong dollar trumping all, weakening the yen and causing a concern in stocks. But Japanese officials had to be happy with the weak yen in a risk off environment. Yen is once again testing the 104 level which has held support over the past couple of weeks.
  • The Mexico peso hit a fresh 6-week high after Hillary Clinton remained firmly in charge at the polls following the third and final presidential debate. Arguments can be made about who won but it would appear that Donald Trump failed to pick up any ground and that is reflected in peso trade today.

11:32:52 ET
10-Year:UNCH 1.744    GNMAs:     EUR/USD:1.0931    USD/JPY:104.01   

The Treasury market remains little changed since our last update with the 10-yr note and the 30-yr bond holding gains while shorter-dated issues display slim losses. The market has settled into a narrow range following an uneventful ECB press conference, during which President Mario Draghi commented on the central bank's choice to not tinker with monetary policy.

The split performance in U.S. Treasuries comes amid modest selling in the equity market. The S&P 500 is lower by 0.3% with nine sectors trading in the red. However, outside of the lightly-weighted telecom services space (-2.0%), the decliners show losses of no more than 0.5% (energy and industrials).

  • Yield Check:
    • 2-yr: +1 bp to 0.81%
    • 5-yr: UNCH at 1.23%
    • 10-yr: -1 bp to 1.74%
    • 30-yr: -2 bps to 2.49%

10:04:27 ET
10-Year:+2/32 1.738    GNMAs:     EUR/USD:1.0950    USD/JPY:103.85   

Longer-dated Treasuries have climbed to new highs for the session while short-dated issues like the 2-yr and the 5-yr remain within an earshot of their levels from overnight action. The modest advance follows a largely uneventful ECB press conference, during which President Mario Draghi toed the line and did not give any hints regarding potential changes to the ECB's purchase program. Mr. Draghi noted that tapering of purchases has not been discussed while an extension of the program is possible, but it is too early to make a call on that front. All-in-all, the ECB chief did not give any ammunition to either side of the increasingly-crowded policy trade. The euro (1.0950) is down 0.2% against the dollar after enjoying a brief spike.

Just released, U.S. Existing Home Sales hit a seasonally adjusted annual rate of 5.47 million in September ( consensus 5.30 million) while September Leading Indicators increased an in-line 0.2%. The data release was followed by a slim downtick across the Treasury complex, but the 10-yr and the 30-yr remain just below session highs that were notched during the past 40 minutes.

  • Yield Check:
    • 2-yr: +2 bps to 0.82%
    • 5-yr: UNCH at 1.23%
    • 10-yr: -1 bp to 1.74%
    • 30-yr: -2 bps to 2.49%

8:38:03 ET
10-Year:-1/32 1.748    GNMAs:     EUR/USD:1.0977    USD/JPY:103.64   

U.S. Treasuries have inched up off their lows following the release of the latest set of economic data, which saw a larger than expected increase in initial claims (260K; consensus 249K). Continuing Claims increased to 2.057 million from 2.046 million while the October Philadelphia Fed survey beat expectations (9.7; consensus 5.5).

The recent move in the bond market has the entire complex trading unchanged after showing modest losses earlier. It is worth noting that European Central Bank President Mario Draghi has begun his press conference, reiterating plans to maintain rates at low levels for an extended period of time. The central bank will continue purchasing assets until March 2017, but reserves the right to extend the program.

  • Yield Check:
    • 2-yr: +1 bp to 0.81%
    • 5-yr: UNCH at 1.23%
    • 10-yr: UNCH at 1.75%
    • 30-yr: UNCH at 2.50%

8:07:33 ET
10-Year:-2/32 1.753    GNMAs:     EUR/USD:1.0980    USD/JPY:103.60   

Modest Losses Persist After ECB Holds

  • European sovereign bonds lurched higher a few minutes ago, but they continue to show modest losses for the day. The European Central Bank released its latest policy statement, which called no changes to the bank's asset purchase program. Market participants will listen to upcoming remarks from ECB President Mario Draghi for clues about the expected policy path. Reports from the past few weeks suggested the bank is ready to taper its purchases, and a confirmation from Mr. Draghi would likely lead to risk-off action in the market. The euro is little changed against the dollar at 1.0975 while the pound is down 0.2% at 1.2262.
  • In the U.K., Prime Minister Theresa May will speak at a EU Summit dinner and she is expected to reiterate that there will be no second referendum on EU membership.
  • Economic Data:
    • Eurozone August Current Account EUR29.70 billion (expected EUR24.30 billion; previous EUR27.70 billion)
    • Germany's September PPI -0.2% month-over-month (consensus 0.2%; last -0.1%); -1.4% year-over-year (consensus -1.2%; last -1.6%)
    • UK's September Retail Sales 0.0% month-over-month (expected 0.4%; last -0.2%); +4.1% year-over-year (consensus 4.8%; last 6.6%). September Core Retail Sales 0.0% month-over-month (expected 0.4%; last -0.1%); +4.0% year-over-year (consensus 4.5%; last 6.2%)
    • Swiss September trade surplus expanded to CHF4.37 billion from CHF3.01 billion (expected surplus of CHF3.27 billion)
  • Yield Check:
    • France, 10-yr OAT: +1 bp to 0.32%
    • Germany, 10-yr bund: +1 bp to 0.04%
    • Greece, 10-yr note: UNCH at 8.37%
    • Italy, 10-yr BTP: UNCH at 1.39%
    • Portugal, 10-yr PGB: -5 bps to 3.13%
    • Spain, 10-yr ODE: UNCH at 1.12%
    • U.K., 10-yr gilt: +3 bps to 1.01%

7:35:43 ET
10-Year:-4/32 1.759    GNMAs:     EUR/USD:1.0981    USD/JPY:103.69   

Treasuries Backtrack

  • U.S. Treasuries have spent the night in a narrow range, seeing some backtracking in recent action. However, the complex may be on the move after the European Central Bank releases its latest policy statement at 7:45 ET. The overnight action was fairly quiet and participants did not receive any market-moving data. Australia did release below-consensus employment figures for September, but the impact has been limited to the Australian dollar, which is down 0.7% against the dollar at 0.7670. The U.S. Dollar Index (97.94, +0.02) is little changed while crude oil is down 1.0% at $51.31/bbl after briefly tagging a fresh high for the year ($51.93/bbl).
  • Yield Check:
    • 2-yr: +2 bps to 0.82%
    • 5-yr: +1 bp to 1.24%
    • 10-yr: +1 bp to 1.76%
    • 30-yr: +1 bp to 2.52%
  • International news:
    • Hong Kong's September CPI +2.7% (last 4.3%)
    • Australia's September Employment Change -9,800 (expected 15,000; last -8,600) and Full Employment Change -53,000 (last 10,100). September Participation Rate 64.5% (expected 64.8%; last 64.7%) and Unemployment Rate 5.6% (expected 5.7%; last 5.6%). NAB Quarterly Business Confidence rose to 5 from 3
    • Eurozone August Current Account EUR29.70 billion (expected EUR24.30 billion; previous EUR27.70 billion)
    • UK's September Retail Sales 0.0% month-over-month (expected 0.4%; last -0.2%). Core Retail Sales 0.0% month-over-month (expected 0.4%; last -0.1%)
  • Data out today:
    • Weekly initial claims for the week ending 10/15 ( consensus 249K) (8:30 ET)
    • October Philadelphia Fed Survey ( consensus 5.5) (8:30 ET)
    • September Existing Home Sales ( consensus 5.30M) (10:00 ET)
    • September Leading Indicators ( consensus 0.2%) (10:00 ET)
  • Fed Speakers:
    • FOMC Vice Chair William Dudley (8:30 ET)

3:22:53 ET
10-Year:-4/32 1.75    GNMAs:     EUR/USD:1.0967    USD/JPY:103.47   

Treasuries Slip in Volatile Trade

  • The U.S. Treasury market traded a little bit lower today but the successive intrday rallies in the face of higher oil and equity prices are probably making the bears feel that the market is up. The September housing start data showed a sharp decline in groundbreakings for new homes last month but that decline is likely to be reversed because building permits beat expectations by almost the same amount. An unexpected draw in crude oil stockpiles last week pushed WTI crude to a fresh three-month high but it tapered its gains by the end of the session. The S&P 500 is trying recover from an early-October sell-off and now trades up 0.35% to 2,147 while the U.S. Dollar Index gains 0.04% to 97.93. Traders now look ahead to Thursday's European Central Bank monetary policy decision
  • Yield Check:
    • 2-yr: +1 bp to 0.81%
    • 5-yr: +1 bp to 1.24%
    • 10-yr: +1 bp to 1.75%
    • 30-yr: +1 bp to 2.52%
  • News:
    • U.S. housing starts unexpectedly dropped to an 18-month low of 1047K in September, missing the consensus of 1168K. August's reading was revised up to 1150K from the initial reading of 1142K
      • Weakness in multi-family starts (lowest since June 2013) was partially offset by some strength in single-family dwellings
    • Building permits, however, jumped to a nine-month high of 1255K in September, beating the consensus of 1164K. August's number was revised up to 1152K from 1139K
      • On a regional basis, the Northeast was the weakest (-36%) but the West saw no change
    • The Fed's Beige Book for late August through early October showed that most Districts experienced a modest or moderate pace of economic expansion. The New York District reported no change in activity
      • Manufacturing activity was mixed, and the strong dollar continued to dampen exports; most regions saw an uptick in retail spending; residential construction and real estate activity expanded further; demand for business and consumer loans increased
    • The MBA Mortgage Index for the week ending October 15 rose 0.6% w/w after falling 6.0% in the prior week
    • Crude oil inventories fell by 5.25 mln barrels for the week ending October 15 versus expectations for a build of 2.7 mln barrels
  • Commodities:
    • WTI crude: +2.02% to $51.64/bbl.
    • Gold: +0.55% to $1,269.8/troy oz.
    • Copper: -0.12% to $2.103/lb.
  • Currencies:
    • EUR/USD: -0.10% to 1.0967
    • USD/JPY: -0.34% to 103.47
  • Data out Thursday:
    • Initial Jobless Claims for the week ending 10/15 and Continuing Jobless Claims for the week ending 10/8 (08:30 ET)
    • October Philadelphia Fed (08:30 ET)
    • September Existing Home Sales (10:00 ET)
    • Natural Gas Inventories for the week ending 10/15 (10:30 ET)
  • Treasury Auction:
    • $5 bln 30-year TIPS reopening (results at 13:00 ET)
  • Fed Speaker:
    • New York Fed President Dudley (FOMC voter) (08:30 ET)