Bond Market Update

Tuesday Reversal Extended

• U.S. Treasuries retreated on Wednesday, making for a continuation of Tuesday's intraday reversal from multi-month highs in longer tenors. The long end underperformed from the start after a night that saw a spectacular plunge in Germany's bunds after the country's main political parties agreed to exempt military spending from deficit limits. Germany's 10-yr bund yield jumped 28 basis points to 2.79%, stopping not far below its high from 2023 (3.02%). As for Treasuries, they fought to recover from a lower start, but a stronger-than-expected ISM Services PMI for February (53.5%; Briefing.com consensus 53.0%) fueled a slide from highs to fresh lows while the rest of the session saw more selling that lifted the 10-yr yield back above its 200-day moving average (4.236%). Tariff-related headlines remained at the forefront of conversation with the White House indicating that automakers will receive a one-month exemption from auto tariffs on imports from Canada and Mexico, though reciprocal tariffs remain on track to be implemented on April 2. Crude oil set a fresh low for the year (65.22), briefly dipping past its low from 2024 (65.27), while the U.S. Dollar Index fell past its 200-day moving average (105.00), sliding 1.4% to 104.31, a level not seen since early November.
• Yield Check:
  • 2-yr: +3 bps to 3.99%
  • 3-yr: +4 bps to 3.99%
  • 5-yr: +5 bps to 4.06%
  • 10-yr: +6 bps to 4.27%
  • 30-yr: +4 bps to 4.56%

• News:
  • President Trump delivered his joint address to Congress last evening, promising to balance the budget and implement tax cuts of $4.5 trillion over a decade.
  • China's National People's Congress set a growth target for 2025 of about 5.0%, aiming for inflation around 2.0%, and a budget deficit of 4.0%, which was expected.
  • The Chinese government is expected to offer various support to sectors like AI, electric vehicles, other new technologies, and the property sector.
  • CK Hutchinson will sell a 90% stake in ports on both sides of the Panama Canal to BlackRock for $19 bln.
  • Japan's trade minister is expected to visit Washington early next week.
  • Reserve Bank of New Zealand Governor Orr resigned unexpectedly.
  • China's February Caixin Services PMI hit 51.4 (expected 50.8; last 51.0).
  • Japan's final February Services PMI hit 53.7 (expected 53.1; last 53.0).
  • South Korea's Q4 GDP expanded 0.1% qtr/qtr, as expected (last 0.1%), growing 1.2% yr/yr, as expected (last 1.2%).
  • India's final February Services PMI hit 59.0 (expected 61.1; last 56.5). 
  • Hong Kong's February Manufacturing PMI hit 49.0 (last 51.0).
  • Singapore's January Retail Sales rose 2.4% m/m (last -2.0%), increasing 4.5% yr/yr (last -2.9%).
  • Australia's final February Services PMI hit 50.8 (expected 51.4; last 51.2). February AIG Construction Index improved to -3.7 from -20.0 and AIG Manufacturing Index rose to -8.2 from -22.7. Q4 GDP grew 0.6% qtr/qtr, as expected (last 0.3%), expanding 1.3% yr/yr (expected 1.2%; last 0.8%).
  • Eurozone's final February Services PMI hit 50.6 (expected 50.7; last 51.3). January PPI was up 0.8% m/m (expected 0.3%; last 0.5%), rising 1.8% yr/yr (expected 1.4%; last 0.1%).
  • Germany's final February Services PMI hit 51.1 (expected 52.2; last 52.5).
  • U.K.'s final February Services PMI hit 51.0 (expected 51.1; last 50.8).
  • France's January Industrial Production was down 0.6% m/m (expected 0.5%; last -0.5%). Final February Services PMI hit 45.3 (expected 44.5; last 48.2). 
  • Italy's final February Services PMI hit 53.0 (expected 50.9; last 50.4). Q4 GDP expanded 0.1% qtr/qtr (expected 0.0%; last 0.0%), growing 0.6% yr/yr (expected 0.5%; last 0.5%). January Retail Sales were down 0.4% m/m (expected 0.3%; last 0.6%) but up 0.9% yr/yr (last 0.6%).
  • Spain's final February Services PMI hit 56.2 (expected 55.4; last 54.9).
  • Swiss February CPI was up 0.6% m/m (expected 0.5%; last -0.4%), rising 0.3% yr/yr (last 0.4%).
• Today's Data:
  • According to ADP, private sector employment increased by just 77,000 jobs in February (Briefing.com consensus 145,000) -- the smallest increase since July -- with small businesses losing 12,000 jobs. Separately, year-over-year pay gains for job changers slowed from 6.8% to 6.7% while pay gains for job-stayers remained flat at 4.7%.
    • The key takeaway from the report is that it reflects a slowdown in hiring activity, which will be construed as a sign of U.S. growth losing some steam.
  • The ISM Services PMI increased to 53.5% in February (Briefing.com consensus 53.0%) from 52.8% in January. The dividing line between expansion and contraction is 50.0%, so the February reading reflects services sector activity expanding but at a faster pace than the prior month. February marked the 54th time in 57 months that the Services PMI indicated expansion.
    • The key takeaway from the report is that the pace of expansion in the nation's largest sector accelerated in February, taking a little edge off the market's growth concerns; however, the acceleration in activity was also accompanied by an acceleration in prices.
  • The S&P Global U.S. Services PMI hit 51.0 in the final reading for February, up from 49.7 in the preliminary reading, but down from January's final reading of 52.9.
  • Factory orders increased 1.7% month-over-month in January (Briefing.com consensus 1.3%) following an upwardly revised 0.6% decline (from -0.9%) in December. Excluding transportation, factory orders rose 0.2% on the heels of a 0.3% increase in December. Shipments of manufactured goods jumped 0.4% in January following a 0.6% increase in December.
    • The key takeaway from the report is that it reflected not only a rebound in orders for nondefense aircraft and parts, but a nice pickup in business spending overall, evidenced by the 0.8% jump in new orders for nondefense capital goods excluding aircraft.
  • The weekly MBA Mortgage Index rose 20.4% after decreasing 1.2% a week ago. The Refinance Index jumped 37.0% while the Purchase Index was up 0.1%.
  • Weekly crude oil inventories increased by 3.614 mln barrels after decreasing by 2.332 mln a week ago.
  • The Federal Reserve's Beige Book for February noted that overall economic activity "rose slightly" since mid-January and that overall expectations for economic activity over the coming months were slightly optimistic.
• Commodities:
  • WTI crude: -3.0% to $66.27/bbl
  • Gold: +0.2% to $2925.70/ozt
  • Copper: +5.3% to $4.80/lb
• Currencies:
  • EUR/USD: +1.6% to 1.0792
  • GBP/USD: +0.8% to 1.2897
  • USD/CNH: -0.2% to 7.2390
  • USD/JPY: -0.6% to 148.88
• The Day Ahead:
  • 8:30 ET: January Trade Balance (Briefing.com consensus -$93.5 bln; prior -$98.4 bln), Revised Q4 Productivity (Briefing.com consensus 1.2%; prior 1.2%), Revised Q4 Unit Labor Costs (Briefing.com consensus 3.0%; prior 3.0%), weekly Initial Claims (Briefing.com consensus 234,000; prior 242,000), and Continuing Claims (prior 1.862 mln)
  • 10:00 ET: January Wholesale Inventories (Briefing.com consensus 0.7%; prior -0.5%)
  • 10:30 ET: Weekly natural gas inventories (prior -261 bcf)