Bond Market Update

Solid Jobs Report Pressures Rate Cut Expectations

• U.S. Treasuries faced heavy selling on Friday, turning the complex negative for the week. The trading day started with slim gains in longer tenors after a night that saw China acknowledge that it is conducting an assessment regarding trade negotiations with the United States. There was also some renewed caution about the near-term likelihood of additional rate cuts from the European Central Bank after eurozone's core CPI accelerated to 2.7% yr/yr in the flash reading for April from 2.4% in March. The modest early gains in longer tenors were reversed in immediate reaction to the jobs report for April, which showed above-consensus nonfarm payroll growth (177,000; Briefing.com consensus 130,000) and a smaller-than-expected increase in average hourly earnings (0.2%; Briefing.com consensus 0.3%). Treasuries tried to rebound in mid-morning trade, but that move found immediate resistance and was followed by a slow slide to fresh lows as the day went on. Today's selling was paced by the short end with the 2-yr yield now up nearly 30 basis points off its low from Thursday. Rate cut expectations fell notably, with the implied likelihood of a cut in June dropping to 34.2% from 58.2% yesterday. The market now expects the next cut to be made in July. Crude oil reversed yesterday's gain, staying below $59/bbl, while the U.S. Dollar Index fell 0.2% to 100.08, narrowing this week's gain to 0.5%.
• Yield Check:
  • 2-yr: +14 bps to 3.84% (+8 bps this week)
  • 3-yr: +15 bps to 3.83% (+7 bps this week)
  • 5-yr: +12 bps to 3.93% (+5 bps this week)
  • 10-yr: +9 bps to 4.32% (+5 bps this week)
  • 30-yr: +6 bps to 4.80% (+6 bps this week)

• News:
  • House Republicans aim to present the text for a reconciliation bill, that will include a proposal to eliminate taxes on tips, overtime pay, and social security benefits, in the coming days, according to NY Times.
  • EU Commissioner for Trade Sefcovic reportedly proposed buying more U.S. goods to reduce the EU's trade surplus with the U.S.
  • Japan's Prime Minister Ishiba said that his country's negotiations with the U.S. have not produced common ground yet while Japan's Finance Minister Kato said that Japan's U.S. Treasury holdings will be a card in negotiations.
  • Japan's March jobs/applications ratio rose to 1.26 from 1.24 (expected 1.25). March Unemployment Rate rose to 2.5% from 2.4% (expected 2.4%). April Monetary Base was down 5.1% yr/yr (expected -2.0%; last -3.2%).
  • South Korea's April CPI was up 0.1% m/m, as expected (last 0.2%), rising 2.1% yr/yr, as expected (last 2.1%). April Manufacturing PMI hit 47.5 (last 49.1).
  • India's April Manufacturing PMI hit 58.2 (expected 58.4; last 58.1).
  • Hong Kong's March Retail Sales were down 3.5% yr/yr (last -13.0%). Q1 GDP expanded 2.0% qtr/qtr (last 0.8%), growing 3.1% yr/yr (last 2.4%).
  • Australia's Q1 PPI was up 0.9% qtr/qtr (expected 0.8%; last 0.8%), rising 3.7% yr/yr (last 3.7%). March Retail Sales were up 0.3% m/m (expected 0.4%; last 0.8%) and Q1 Retail Sales were unchanged qtr/qtr (last 0.8%).
  • Eurozone's April Manufacturing PMI hit 49.0 (expected 48.0; last 48.3). April flash CPI was up 0.6% m/m (last 0.6%), rising 2.2% yr/yr (expected 2.1%; last 2.2%). April Core CPI was up 1.0% m/m (last 1.0%), rising 2.7% yr/yr (expected 2.5%; last 2.4%). March Unemployment Rate remained at 6.2% (expected 6.1%).
  • Germany's April Manufacturing PMI hit 48.4 (expected 48.0; last 48.3).
  • France's April Manufacturing PMI hit 48.7 (expected 48.2; last 48.5). March government budget deficit widened to EUR47.0 bln from EUR40.3 bln.
  • Italy's April Manufacturing PMI hit 49.3 (expected 47.1; last 46.6). March Unemployment Rate rose to 6.0% from 5.9%, as expected.
  • Spain's April Manufacturing PMI hit 48.1 (expected 50.0; last 49.5).
  • Swiss April Manufacturing PMI hit 45.8 (expected 48.7; last 48.9).
• Today's Data:
  • April nonfarm payrolls increased by 177,000 (Briefing.com consensus 130,000). The 3-month average for total nonfarm payrolls increased to 155,000 from 133,000. March nonfarm payrolls revised to 185,000 from 228,000. February nonfarm payrolls revised to 102,000 from 117,000.
    • April private sector payrolls increased by 167,000 (Briefing.com consensus 125,000). March private sector payrolls revised to 170,000 from 209,000. February private sector payrolls revised to 107,000 from 116,000.
    • April unemployment rate was 4.2% (Briefing.com consensus 4.2%), versus 4.2% in March. Persons unemployed for 27 weeks or more accounted for 23.5% of the unemployed versus 21.3% in March. The U6 unemployment rate, which accounts for unemployed and underemployed workers, decreased to 7.8% from 7.9%.
    • April average hourly earnings were up 0.2% (Briefing.com consensus 0.3%) versus 0.3% in March. Over the last 12 months, average hourly earnings have risen 3.8% versus 3.8% for the 12 months ending in March.
    • The average workweek in April was 34.3 hours (Briefing.com consensus 34.2), versus an upwardly revised 34.3 hours (from 34.2 hours) in March. Manufacturing workweek was down 0.2 hours to 40.0 hours. Factory overtime was unchanged at 2.9 hours.
    • The labor force participation rate increased to 62.6% from 62.5% and the employment-population ratio increased to 60.0% from 59.9%.
    • Factory orders surged 4.3% month-over-month in March (Briefing.com consensus 4.1%), bolstered by aircraft orders, after increasing a downwardly revised 0.5% (from 0.6%) in February. Excluding transportation, factory orders declined 0.2% after increasing 0.3% in February. Shipments of manufactured goods slipped 0.1% after increasing 0.7% in February.
    • The key takeaway from the report is that the headline number masks a languid situation for factory orders in March, which were negative when the transportation component is removed.
• Commodities:
  • WTI crude: -1.6% to $58.36/bbl 
  • Gold: +0.6% to $3242.10/ozt
  • Copper: +1.5% to $4.69/lb
• Currencies:
  • EUR/USD: +0.1% to 1.1302
  • GBP/USD: +0.1% to 1.3277
  • USD/CNH: -0.7% to 7.2204
  • USD/JPY: -0.2% to 144.97
• The Week Ahead:
  • Monday: April ISM Services (prior 50.8%) at 10:00 ET and $58 bln 3-yr Treasury note auction results at 13:00 ET
  • Tuesday: March Trade Balance (prior -$122.7 bln) at 8:30 ET and $42 bln 10-yr Treasury note auction results at 13:00 ET
  • Wednesday: Weekly MBA Mortgage Index (prior -4.2%) at 7:00 ET; weekly crude oil inventories (prior -2.696 mln) at 10:30 ET; May FOMC Rate Decision (prior 4.25-4.50%) at 14:00 ET; and March Consumer Credit (prior -$0.8 bln) at 15:00 ET
  • Thursday: Preliminary Q1 Productivity (prior 1.5%), preliminary Q1 Unit Labor Costs (prior 2.2%), weekly Initial Claims (prior 241,000), and Continuing Claims (prior 1.916 mln) at 8:30 ET; March Wholesale Inventories (prior 0.3%) at 10:00 ET; weekly natural gas inventories (prior +107 bcf) at 10:30 ET; and $25 bln 30-yr Treasury bond auction results at 13:00 ET
  • Friday: Nothing of note