Bond Market Update

Under Pressure

• U.S. Treasuries were under selling pressure today, as rising oil prices, new tariff proposals, and some solid economic data all converged to drive the view that the Fed won't be cutting the target range for the fed funds rate anytime soon. Notably, there was talk of private credit concerns resurfacing, and major equity indices lost ground, yet Treasuries did not serve as a safe haven today in a broad sense. The 10-yr note yield hit 4.50%, and the 30-yr bond yield reached 5.00% before running into resistance. The dollar was bid on the pleasing ADP and ISM Services PMI data that kept rate-cut hopes stifled. The U.S. Dollar Index was up 0.3% to 99.53.
• Yield Check:
  • 2-yr: +4 bps to 4.09%
  • 3-yr: +4 bps to 4.14%
  • 5-yr: +4 bps to 4.22%
  • 10-yr: +4 bps to 4.49%
  • 30-yr: +2 bps to 4.99%

• News:
  • Iran launched multiple rocket and drone attacks in the Persian Gulf, and the U.S. conducted self-defense strikes on Iran's Qeshm Island. The attacks placed additional pressure on a fragile ceasefire. NBC News
  • World Source News quotes Iran’s Foreign Minister Abbas Araghchi who says "Communication with the Americans has not been cut off, and messages have been exchanged regarding the need to stop attacks against Beirut. However, despite this, no tangible progress has been achieved in the negotiation process."
  • Israeli Prime Minister Benjamin Netanyahu CNBC interview: Iran is always lying and cheating. Any agreement with Iran needs verification. Nuclear material needs to get removed with Iran.
  • Fed Chair Kevin Warsh hired conservative policy analysts Paul Winfree and Daniel Heil as advisers. Bloomberg
  • USTR proposal to impose added tariffs of 10.0% to 12.5% for as many as 60 countries, including China, Japan, and those in the European Union, due to findings of using forced labor to make goods for export.
  • Deutsche Bank will need more credit provisions than previously thought, according to Bloomberg
  • Final Services PMI readings for May were better than expected for many European countries but still below 50.0, which is the demarcation line between expansion and contraction.
  • Partners Group decided to cap withdrawals from $8.6 bln fund, according to Reuters
  • Eurozone's May HCOB Services PMI 47.7 (expected 46.4; last 47.6); April PPI 0.6% m/m (expected 0.6%; last 3.4%) and 4.9% yr/yr (expected 4.8%; last 2.0%)
  • Australia's Q1 GDP 0.3% qtr/qtr (expected 0.5%; last 0.9%) and 2.5% yr/yr (expected 2.7%; last 2.5%)
• Today's Data:
  • The ADP Employment Change Report for May also created some buzz, as it was a fairly solid report. Private sector employment increased by 122,000 (Briefing.com consensus: 110,000) following a downwardly revised 105,000 (from 109,000) in April. The job gains were concentrated mostly in the service-providing sector (114,000), and they occurred across all business sizes, led by small establishments (67,000).
    • This report is a nice precursor to Friday's more comprehensive Employment Situation Report, and it is also another reminder why the Fed isn't expected to cut the target range for the fed funds rate anytime soon.
  • The ISM Services PMI increased to 54.5% in May (Briefing.com consensus: 53.6%) from 53.6% in April. The dividing line between expansion and contraction is 50.0%, so the May reading reflects services sector activity growing at a faster pace than the prior month.
    • The key takeaway from the report is the understanding that activity for the country's largest business sector picked up pace in May, notwithstanding higher prices that were reflected in the highest average 12-month reading (68%) since April 2023.
  • Factory orders increased 4.8% month-over-month in April (Briefing.com consensus: 3.5%) following an upwardly revised 1.8% increase (from 1.5%) in March. Excluding transportation, factory orders increased 1.3% on the heels of a 1.8% increase in March. Shipments of manufactured goods were up 1.0% after increasing 1.5% in March.
    • The key takeaway from the report is that the headline numbers masked a weak month for business spending, evidenced by the 1.0% decline in nondefense capital goods orders, excluding aircraft. To be fair, that decline followed a very strong 3.8% increase in March, so it could just be a natural pullback after a large increase.
  • May Final S&P Global Services PMI 50.7% versus 50.9% prior.
  • The Fed's Beige Book reported economic activity increased at a slight to moderate pace for 10 of the 12 Federal Reserve Districts. One reported a slight decline and one reported no change.
• Commodities: 
  • WTI crude: +2.4% to $96.08/bbl
  • Gold: -1.3% to $4463.40/ozt
  • Copper: -2.4% to $6.50/lb
• Currencies:
  • EUR/USD: -0.3% to 1.1598
  • GBP/USD: -0.4% to 1.3418
  • USD/CNH: +0.3% to 6.7805
  • USD/JPY: +0.1% to 160.02
• The Day Ahead:
  • 08:30 ET: Q1 Productivity (Briefing.com consensus: 0.8%; prior 0.8%) and Unit Labor Costs (Briefing.com consensus: 2.3%; prior 2.3%) - Revised
  • 08:30 ET: Weekly Initial Jobless Claims (Briefing.com consensus: 216,000; prior 215,000) and Continuing Jobless Claims (prior 1786K)
  • 08:30 ET: Richmond Fed President Barkin (non-FOMC voter)
  • 10:00 ET: Fed Governor Bowman (FOMC voter)
  • 10:30 ET: EIA Natural Gas Inventories (prior +92 bcf)
  • 13:00 ET: Kansas City Fed President Schmid (non-FOMC voter)

Buyers Sidelined

• Not much buying interest thus far, as the 10-yr note yield hits 4.50% (again) and the 30-yr bond yield touches 5.00% (again).
• Higher yields have been a limiting factor for stocks today, as they are experiencing a setback led by high-beta and growth stocks.
• WTI crude futures +2.3%, or $2.21, to $95.97/bbl. Brent crude futures are up 2.1%, or $2.00, to $98.00/bbl.
• Yield check:
  • 2-yr: +4 bps to 4.09%
  • 3-yr: +4 bps to 4.14%
  • 5-yr: +4 bps to 4.22%
  • 10-yr: +5 bps to 4.50%
  • 30-yr: +3 bps to 5.00%

Data Recon

• The ISM Services PMI increased to 54.5% in May (Briefing.com consensus: 53.6%) from 53.6% in April. The dividing line between expansion and contraction is 50.0%, so the May reading reflects services sector activity growing at a faster pace than the prior month.
  • The key takeaway from the report is the understanding that activity for the country's largest business sector picked up pace in May, notwithstanding higher prices that were reflected in the highest average 12-month reading (68%) since April 2023.
• Factory orders increased 4.8% month-over-month in April (Briefing.com consensus: 3.5%) following an upwardly revised 1.8% increase (from 1.5%) in March. Excluding transportation, factory orders increased 1.3% on the heels of a 1.8% increase in March. Shipments of manufactured goods were up 1.0% after increasing 1.5% in March.
  • The key takeaway from the report is that the headline numbers masked a weak month for business spending, evidenced by the 1.0% decline in nondefense capital goods orders, excluding aircraft. To be fair, that decline followed a very strong 3.8% increase in March, so it could just be a natural pullback after a large increase.
• May Final S&P Global Services PMI 50.7% versus 50.9% prior.
• Yield check:
  • 2-yr: +2 bps to 4.07%
  • 3-yr: +2 bps to 4.12%
  • 5-yr: +2 bps to 4.20%
  • 10-yr: +2 bps to 4.47%
  • 30-yr: +1 bp to 4.98%

Data Recon

• The ADP Employment Change Report for May also created some buzz, as it was a fairly solid report. Private sector employment increased by 122,000 (Briefing.com consensus: 110,000) following a downwardly revised 105,000 (from 109,000) in April. The job gains were concentrated mostly in the service-providing sector (114,000), and they occurred across all business sizes, led by small establishments (67,000).
  • This report is a nice precursor to Friday's more comprehensive Employment Situation Report, and it is also another reminder why the Fed isn't expected to cut the target range for the fed funds rate anytime soon
• Yield check:
  • 2-yr: +3 bps to 4.08%
  • 3-yr: +3 bps to 4.12%
  • 5-yr: +3 bps to 4.21%
  • 10-yr: +4 bps to 4.49%
  • 30-yr: +2 bps to 4.99%

Feeling Weak

• U.S. Treasuries are weaker coming out of the overnight trade, which was influenced by rising oil prices that reflected renewed hostilities between the U.S. and Iran. Separately, inflation worries were in the mix after the USTR proposed an added tariff of 10.0% to 12.5% for as many as 60 countries, including China, Japan, and those in the European Union, for using forced labor to make goods for export. There is a good bit of economic data today, with the focal points being the ADP Employment Change report and the Services PMI readings for May. Most PMIs were better than expected in Europe but still below the 50.0 mark, which is the line between expansion (above) and contraction (below). The U.S. Dollar Index is up 0.1% to 99.31.
• Yield Check:
  • 2-yr: +2 bps to 4.07%
  • 3-yr: +2 bps to 4.12%
  • 5-yr: +2 bps to 4.20%
  • 10-yr: +3 bps to 4.48%
  • 30-yr: +1 bp to 4.98%

• News:
  • Iran launched multiple rocket and drone attacks in the Persian Gulf, and the U.S. conducted self-defense strikes on Iran's Qeshm Island. The attacks placed additional pressure on a fragile ceasefire. NBC News
  • Fed Chair Kevin Warsh hired conservative policy analysts Paul Winfree and Daniel Heil as advisers. Bloomberg
  • USTR proposal to impose added tariffs of 10.0% to 12.5% for as many as 60 countries, including China, Japan, and those in the European Union, due to findings of using forced labor to make goods for export.
  • Treasury Secretary Scott Bessent will testify to the Senate Finance Committee today at 10:00 ET
  • Final Services PMI readings for May were better than expected for many European countries but still below 50.0, which is the demarcation line between expansion and contraction.
  • Partners Group decided to cap withdraws from $8.6 bln fund, according to Reuters
  • Eurozone's May HCOB Services PMI 47.7 (expected 46.4; last 47.6); April PPI 0.6% m/m (expected 0.6%; last 3.4%) and 4.9% yr/yr (expected 4.8%; last 2.0%)
  • Australia's Q1 GDP 0.3% qtr/qtr (expected 0.5%; last 0.9%) and 2.5% yr/yr (expected 2.7%; last 2.5%)
• Commodities: 
  • WTI crude: +2.1% to $95.84/bbl
  • Gold: -0.6% to $4491.80/ozt
  • Copper: -0.9% to $6.62/lb
• Currencies:
  • EUR/USD: -0.1% to 1.1620
  • GBP/USD: -0.1% to 1.3454
  • USD/CNH: +0.1% to 6.7702
  • USD/JPY: -0.1% to 159.80
• The Day Ahead:
  • 07:00 ET: MBA Mortgage Applications Index (prior -8.5%)
  • 08:15 ET: May ADP EMployment Change (Briefing.com consensus: 110K; prior 109K)
  • 09:45 ET: May S&P Global U.S. Services PMI - Final (prior 50.9)
  • 10:00 ET: April Factor Orders (Briefing.com consensus: 3.5%; prior 1.5%)
  • 10:00 ET: May ISM Non-Manufacturing Index (Briefing.com consensus: 53.6%; prior 53.6%)
  • 10:00 ET: New York Fed President Williams (FOMC voter)
  • 14:00 ET: Fed's Beige Book