Bond Market Update

Data Recon

• Nonfarm business sector labor productivity increased 2.8% in the fourth quarter (Briefing.com consensus: 4.0%) following an upwardly revised 5.2% (from 4.9%) in the third quarter. Unit labor costs jumped 2.8% in the fourth quarter (Briefing.com consensus: 0.2%) on the heels of an upwardly revised 1.8% decline (from -1.9%) in the third quarter.
  • The key takeaway from the report is that the productivity increase itself was pretty solid, yet that consideration was offset by the comparable jump in unit labor costs that aren't going to help ease concerns about sticky inflation pressures.
• Relatedly, import prices rose 0.2% month-over-month but were down 0.1% year-over-year. Excluding fuel, import prices were up 0.5% month-over-month and were up 1.2% year-over-year. Export prices, meanwhile, climbed 0.6% month-over-month in January and were up 2.6% year-over-year. Nonagricultural export prices increased 0.7% month-over-month and were up 2.7% year-over-year.
• Initial jobless claims were unchanged at 213,000 for the week ending February 28. Continuing jobless claims increased 46,000 to 1.868 million for the week ending February 21.
  • The key takeaway from the report will be the continuing low level of initial jobless claims, which connotes a labor market that is slow to fire employees.
• Yield Check:
  • 2-yr: +5 bps to 3.59%
  • 3-yr: +6 bps to 3.61%
  • 5-yr: +7 bps it 3.74%
  • 10-yr: +6 bps to 4.14%
  • 30-yr: +5 bps to 4.76%

Extending Recent Losses

• U.S. Treasuries are on track for another lower start after a night that saw selling in most sovereign debt. Treasury futures began facing pressure shortly after yesterday's cash close, continuing their retreat into the night. The market reached lows at the start of the European session, with action remaining just above those levels at this juncture. Overnight session saw an improvement in sentiment surrounding equities, masking some ongoing concerns about energy security. To that end, top Chinese refiners have reportedly been instructed to suspend exports of diesel and gasoline due to the U.S. conflict with Iran. Overall rate cut expectations are facing some pressure as markets reconsider the inflationary impact of a higher price of oil. WTI crude has climbed toward $77/bbl, briefly overtaking its Tuesday high in the process, while the U.S. Dollar Index is up 0.1% at 98.90.
• Yield Check:
  • 2-yr: +4 bps to 3.58%
  • 3-yr: +4 bps to 3.59%
  • 5-yr: +5 bps to 3.72%
  • 10-yr: +5 bps to 4.13%
  • 30-yr: +3 bps to 4.75%

• News:
  • China's National People's Congress set China's 2026 GDP growth target between 4.5% and 5.0% with CPI expected at 2.0%.
  • Japan's largest industrial labor union will seek a pay increase of about 6.5% for regular workers during upcoming Spring Wage talks.
  • Morgan Stanley expects that the European Central Bank will not cut rates until 2027 unless there is a downside shock to growth.
  • DHL noted that air and ocean freight in the Middle East have been heavily disrupted.
  • Maersk suspended cargo bookings to and from several Gulf nations.
  • The Bank of England's Decision Maker Panel survey showed an increase in year-ahead CPI expectations to 3.0% from 2.9% while the three-year outlook was lowered to 2.8% from 2.9%.
  • Australia's January trade surplus reached AUD2.631 bln (expected surplus of AUD3.780 bln; last surplus of AUD3.373 bln) as imports grew 0.8% m/m (last -1.8%) and exports fell 0.9% m/m (last 0.9%).
  • Singapore's January Retail Sales were up 6.1% m/m (last -2.7%) but down 0.4% yr/yr (last 2.5%).
  • Eurozone's January Retail Sales were down 0.1% m/m (expected 0.3%; last 0.2%) but up 2.0% yr/yr (expected 1.7%; last 1.8%).
  • U.K.'s February Construction PMI hit 44.5 (expected 47.0; last 46.4).
  • France's January Industrial Production was up 0.5% m/m (expected 0.4%; last 0.5%).
  • Italy's January Retail Sales rose 0.6% m/m (expected -0.1%; last -0.7%), increasing 2.3% yr/yr (last 1.1%).
  • Spain's January Industrial Production rose 0.3% yr/yr (expected 1.7%; last -0.3%).
  • Swiss February Unemployment Rate rose to 3.0% from 2.9% (expected 2.9%).
• Commodities:
  • WTI Crude: +3.0% to $76.87/bbl
  • Gold: +0.8% to $5174.90/ozt
  • Copper: -1.5% to $5.82/lb
• Currencies:
  • EUR/USD: -0.2% to 1.1609
  • GBP/USD: -0.1% to 1.3355
  • USD/CNH: +0.2% to 6.9053
  • USD/JPY: +0.3% to 157.49
• Data out Today:
  • 8:30 ET: Preliminary Q4 Productivity (Briefing.com consensus 4.0%; prior 4.9%), preliminary Q4 Unit Labor Costs (Briefing.com consensus 0.2%; prior -1.9%), weekly Initial Claims (Briefing.com consensus 216,000; prior 212,000), Continuing Claims (prior 1.833 mln), January Import Prices (prior 0.1%), Import Prices ex-oil (prior 0.4%), Export Prices (prior 0.3%), and Export Prices ex-agriculture (prior 0.3%)
  • 10:30 ET: Weekly natural gas inventories (prior -52 bcf)

Longer Tenors Resist Continued Pressure

• U.S. Treasuries endured an extension of this week's losses with some intraday divergence as the long bond recovered some of its starting loss while shorter tenors underperformed after upbeat economic data. Treasuries started the day with modest losses just as the market received a strong ADP Employment Change report for February (63,000; Briefing.com consensus 42,000), which was later followed by an impressive February ISM Services Index (56.1%; Briefing.com consensus 53.9%). The late-morning release prompted a slip to fresh lows in the 10-yr note and shorter tenors while the long bond stayed above its morning low, eventually rising past its starting level. However, shorter tenors finished near their lows, continuing this week's underperformance. Crude oil edged toward $75/bbl, but stayed about $3/bbl below yesterday's high, which was encouraging for overall sentiment. The U.S. Dollar Index fell 0.3% to 98.75, dipping from a six-week high.
• Yield Check:
  • 2-yr: +4 bps to 3.54%
  • 3-yr: +4 bps to 3.55%
  • 5-yr: +4 bps to 3.67%
  • 10-yr: +2 bps to 4.08%
  • 30-yr: +1 bp to 4.72%

• News:
  • Kevin Warsh was officially nominated for Fed Chairman.
  • French Finance Minister Lescure said that there is no risk of energy shortages in the coming weeks.
  • Italy's Energy Minister Fratin said that his country is safe when it comes to gas supplies with no severe risk in sight.
  • China's February Manufacturing PMI hit 49.0 (expected 49.1; last 49.3) and Non-Manufacturing PMI hit 49.5 (expected 49.8; last 49.4). February RatingDog Manufacturing PMI hit 52.1 (expected 50.1; last 50.3) and RatingDog Services PMI hit 56.7 (expected 52.3; last 52.3).
  • Japan's February Services PMI hit 53.8, as expected (last 53.7) and February Household Confidence rose to 40.0 from 37.9 (expected 38.2).
  • South Korea's January Retail Sales rose 2.3% m/m (last 0.6%), January Industrial Production fell 1.9% m/m (expected 0.5%; last 1.5%) but was up 7.1% yr/yr (expected 2.2%; last 1.4%)
  • Hong Kong's February Manufacturing PMI hit 53.3 (last 52.3) and January Retail Sales rose 5.5% yr/yr (last 6.6%).
  • Australia's February Services PMI hit 52.8 (expected 52.2; last 56.3). Q4 GDP expanded 0.8% qtr/qtr (expected 0.7%; last 0.5%), growing 2.6% yr/yr (expected 2.2%; last 2.1%). Q4 GDP Chain Price Index was up 1.4% (last 0.8%).
  • New Zealand's Q4 Terms of Trade Index was up 3.7% qtr/qtr (expected -0.1%; last -2.1%).
  • India's February Services PMI hit 58.1 (expected 58.4; last 58.5).
  • Eurozone's February Services PMI hit 51.9 (expected 51.8; last 51.8). January Unemployment Rate fell to 6.1% from 6.2% (expected 6.2%), and January PPI was up 0.7% m/m (expected 0.2%; last -0.3%) but down 2.1% yr/yr (expected -2.7%; last -2.0%).
  • Germany's February Services PMI hit 53.5 (expected 53.4; last 53.4).
  • U.K.'s February Services PMI hit 53.9, as expected (last 53.9).
  • France's February Services PMI hit 49.6, as expected (last 49.6).
  • Italy's Q4 GDP was up 0.3% qtr/qtr, as expected (last 0.2%), rising 0.8% yr/yr, as expected (last 0.7%). January Unemployment Rate fell to 5.1% from 5.5% (expected 5.6%). February Services PMI hit 52.3 (expected 52.6; last 52.9).
  • Spain's February Services PMI hit 51.9 (expected 52.9; last 53.5).
  • Swiss February CPI was up 0.6% m/m (expected 0.5%; last -0.1%), rising 0.1% yr/yr (expected -0.1%; last 0.1%).
• Today's Data:
  • The ISM Services PMI checked in at 56.1% in February (Briefing.com consensus: 53.9%), up from 53.8% in January. The dividing line between expansion and contraction is 50.0%, so the February reading, which is the highest since July 2022, reflects services sector activity growing at a faster pace than the prior month.
    • The key takeaway from the report is the recognition that activity in the nation's largest sector accelerated in February. While this is survey-based data, it will nonetheless create a sense of optimism about Q1 growth prospects.
  • The ADP Employment Change report pointed to the addition of 63,000 nonfarm payrolls in February (Briefing.com consensus 42,000) while the January increase was revised down to 11,000 from 22,000.
  • The S&P Global U.S. Services PMI hit 51.7 in the final reading for February, down from 52.3 in the preliminary reading and down from 52.7 in January.
  • The weekly MBA Mortgage Index was up 11.0% to follow last week's 0.4% uptick. The Purchase Index was up 6.2% while the Refinance Index jumped 14.3%.
  • The Fed's Beige Book noted that economic activity since the last survey increased at a slight to moderate pace in most Districts, though the number of Districts reporting flat or declining activity grew to five from four. Consumer spending increased slightly with soft spots in two Districts. Auto sales were mostly down with affordability cited as the culprit. Commercial lending showed strength while residential real estate sales and construction activity decreasing slightly. Employment was stable in most Districts while prices increased across all Districts, but with some variations in pace.
  • Weekly crude oil inventories increased by 3.475 mln barrels after increasing by 15.99 mln barrels a week ago.
• Commodities:
  • WTI Crude: +0.2% to $74.70/bbl
  • Gold: +0.2% to $5134.40/ozt
  • Copper: +1.6% to $5.91/lb
• Currencies:
  • EUR/USD: +0.3% to 1.1640
  • GBP/USD: +0.1% to 1.3373
  • USD/CNH: -0.3% to 6.8930
  • USD/JPY: -0.4% to 157.01
• The Day Ahead:
  • 8:30 ET: Preliminary Q4 Productivity (Briefing.com consensus 4.0%; prior 4.9%), preliminary Q4 Unit Labor Costs (Briefing.com consensus 0.2%; prior -1.9%), weekly Initial Claims (Briefing.com consensus 216,000; prior 212,000), Continuing Claims (prior 1.833 mln), January Import Prices (prior 0.1%), Import Prices ex-oil (prior 0.4%), Export Prices (prior 0.3%), and Export Prices ex-agriculture (prior 0.3%)
  • 10:30 ET: Weekly natural gas inventories (prior -52 bcf)

Some Resilience on Display

• U.S. Treasuries have stayed above their morning lows with the long bond recovering the bulk of its opening loss while the 5-yr note is back to its starting level. Early action saw some selling, which set sights on yesterday's lows, but the market has been resilient, which has been encouraging given the recent dose of geopolitical uncertainty. Equities, meanwhile, have largely recovered from yesterday's weakness with the S&P 500 (+0.9%) essentially back at its closing level from Monday with its 50-day moving average (6905) looming about 30 points above.
• Yield Check:
  • 2-yr: +3 bps to 3.53%
  • 3-yr: +2 bps to 3.53%
  • 5-yr: +3 bps to 3.66%
  • 10-yr: +2 bps to 4.08%
  • 30-yr: +1 bp to 4.71%

Early Losses Widened

• U.S. Treasuries trade near their lowest levels of the session after a failed bounce attempt during the first few minutes of today's action. Treasuries followed their lower start with a brief bounce attempt that ran into resistance well before Treasuries reached their closing levels from Tuesday. Recent trade has seen some renewed selling with 5s and shorter tenors hitting lows in immediate reaction to the February ISM Services Index (56.1%; Briefing.com consensus 53.9%), which beat expectations by a solid margin, reflecting accelerating growth in the services sector. Equities are off to a higher start with the S&P 500 (+0.5%) trimming this week's loss to 0.4%.
• Yield Check:
  • 2-yr: +3 bps to 3.53%
  • 3-yr: +3 bps to 3.54%
  • 5-yr: +4 bps to 3.67%
  • 10-yr: +3 bps to 4.09%
  • 30-yr: +2 bps to 4.73%