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The Week in Review: Yields Edge Up in Choppy Trade
The Week Ahead
- Treasuries lost ground amid a rather subdued week for the complex.
- A choppy week saw yields unable to break out of their recent ranges.
- Macro headlines included the People's Bank of China cutting rates, ECB head Mario Draghi discussing further easing, and Japanese Prime Minister Shinzo Abe dissolving parliament and pushing back the consumption tax hike.
- The latest FOMC minutes were in-line with expectations. Key takeaways from the minutes included some members wanted to remove the 'considerable time' language and that the staff inflation forecast was reduced as a result of the decline in energy prices.
- Economic data was mixed.
- PPI (0.2% actual v. -0.2% expected), NAHB Housing Market Index (58 actual v. 55 expected), building permits (1080K actual v. 1040K expected), CPI (0.0% actual v. -0.1% expected), existing home sales (5.26M actual v. 5.17M expected), Philly Fed (40.8 actual v. 18.3 expected), and leading indicators (0.9% actual v. 0.6% expected) all outpaced estimates.
- Empire Manufacturing (10.2 actual v. 12.0 expected), industrial production (-0.1% actual v. 0.2% expected), capacity utilization (78.9% actual v. 79.3% expected), and housing starts (1009K actual v. 1025K expected) all missed expectations.
- Up front, the 2Y edged up +2bps to 0.513%. Action spent the entire week bouncing between 0.500%/0.550%, as it has since the end of October,
- In the belly, the 5Y added +4bps to 1.611%. the yield has spent much of the past three weeks between 1.600%/1.650%.
- The 10Y rallied +3bps to 2.315%. The benchmark yield has been unable to break out of the 2.300%/2.350% range.
- At the long end, the 30Y finished flat @ 3.021%. The yield on the long bond has spent the past month trapped between 3.000%/3.100%.
- A slightly flatter curve developed as the 2-10-yr spread narrowed to 180bps.
- There is no data on Monday. Treasury will auction $28 bln 2Y notes.
- Data kicks off for the week on Tuesday with GDP - Second Estimate (8:30), Case-Shiller 20-city Index, FHFA Housing Price Index (9), and consumer confidence (10). Treasury will hold a $35 bln 5Y note auction.
- Wednesday's data is heavy as the weekly MBA Mortgage Index (7), initial and continuing claims, durable orders, personal income and spending, PCE Prices - Core (8:30), Chicago PMI (9:45), Michigan Sentiment - Final (9:55), new home sales, and pending home sales (10) are due out. Treasury will auction $29 bln 7Y notes.
- Markets are closed Thursday in observance of Thanksgiving Day.
- On Friday, U.S. equity markets will close at 1pm ET and the U.S. Treasury market will close at 2pm ET.
Dollar Flirts with Best Close Since June 2010:
- The Dollar Index trades on session highs and is on track to post its best close since June 2010.
- EURUSD is -155 pips @ 1.2385 and is flirting with its lowest levels in 27 months. The single currency has been punished following early comments from ECB head Mario Draghi that suggested the central bank will "do what we must to raise inflation and inflation expectations as fast as possible." A close below 1.2375 would be the worst since August 2012.
- GBPUSD is -40 pips @ 1.5650 as action contends with its own 14-month low. Participants have taken note of prior comments from MPC member David Miles, which warned specific rate guidance is dangerous as there are many unforeseeable developments that could change that path. Also impacting trade was a disappointing net lending to individuals number. A finish below 1.5630 would be the lowest since September 2013.
- USDCHF is +120 pips @ .9700 as trade piggybacks the weakness in the euro. Traders are watching the .9725 region closely as a finish above there would be the best since May 2013.
- USDJPY is -40 pips @ 117.80 as action slides off seven-year highs. Today's selling has been exacerbated by the flight to risk that developed in response to the People's Bank of China cutting both its deposit and lending rates.
- AUDUSD is +50 pips @ .8670 as trade lifts off key support in the .8550/.8600 area. The hard currency climbed as high as .8722 after the PBOC announcement crossed the wires, but has surrendered a decent amount of those gains. Aussie bulls hope to put in a close above .8650.
- USDCAD is -65 pips @ 1.1240 as modest selling takes hold for a second day. The pair probed 1.1200 support and the 50 dma following the hotter than expected Core CPI (0.3% MOM actual v. 0.2% MoM expected) reading, but has seen a bounce off the level.
Afternoon Update: 2Y unch @ 99 23/32...3Y +01/32 @ 99 24/32...5Y +02/32 @ 99 14/32...7Y +04/32 @ 99 25/32...10Y +05/32 @ 99 10/32...30Y +17/32 @ 99 13/32...EURUSD -155 pips @ 1.2380...GBPUSD -45 pips @ 1.5645...USDJPY -50 pips @ 117.70...USDCHF +120 pips @ .9700...AUDUSD +55 pips @ .8675...USDCAD -70 pips @ 1.1235
On the Highs:
- Treasuries linger near session highs as another sleepy trade engulfs the complex
- A stubborn bid has persisted throughout the morning, lifting maturities off their early lows
- Today's lack of economic data has kept yields in a tight 4bp range.
- The 10Y holds -1.3bps @ 2.322%, and continues its test of the key 2.300% area
- A flatter curve persists as the 2-10-yr spread trades 181.5bps.
- Precious metals hold near their highs with gold +$12 @ $1203 and silver +$0.39 @ $16.53.
DXY Moves Above 88 on Central Bank Divergence: The Dollar Index was able to climb off the low end of its recent consolidation range as China and Europe central banks moved towards further easing. A rate cut by the PBoC and more dovish language from ECB President Mario Draghi led to a run in risk assets and moved the DXY back above 88. The DXY hit 88.21 in early trade, just a shade below its recent mutli-year high of 88.26 set on November 14. There is no economic data today. Next week all data will be released on Tuesday and Wednesday due to the Thanksgiving Holiday. Notables include: Tue- Q3 GDP revision, housing prices, and consumer confidence; Wed- claims, rurables, personal income & spending; Chicago PMI, and new home sales.
- The euro fell as ECB President Mario Draghi once again was able to use the pulpit as an effective QE tool. Mr. Draghi reiterated that the ECB would take whatever action it needed and also stated that the central bank did not need a crisis to take action. The ECB also finally announced the official ABS program was underway. The euro is trading at 1.2411 as we head towards the weekend. 1.2358 is the multi-year low the single currency hit on November 7 and is on traders' radars.
- The pound has dipped back into 1.56 territory following the dollar rally. Against the euro, sterling held the .8000 support level and has moved back to .7913 following the Draghi comments. It is currently testing the 100 sma (.7920) in that trade.
- The yen is holding 118 and has moved higher as equity markets and risk assets see a small roll over. A poll today showed that Japanese citizens were growing skeptical of Abenomics, which is helping provide a boost to the yen. This will be a key issue to watch as the snap elections are set for December 21.
Treasuries Press the Highs:
- Treasuries trade on session highs.
- The bid has yields moving into a test of the lower bounds of their recent ranges.
- Early strength is having the biggest impact on the long end has the 30Y holds -1.6bps @ 3.037%.
- A -1bp drop has the 10Y down 2.325%.
- Little change in the belly has the 5Y holding near 1.620%.
- A slightly flatter curve persists as the 2-10-yr spread trades 183bps.
- Precious metals are near session highs with gold +$13 @ $1204 and silver +$0.34 @ $16.48.
- Yields press lower across Europe.
- European Central Bank President Mario Draghi spoke in Frankfurt and suggested further easing would help the region's economy.
- German Bunds hold small gains. A -2bp drop has the 10Y down to 0.785% and within a couple bps of all-time lows.
- UK Gilts are sharply higher following the release of the text of a speech previosuly delivered by Bank of England MPC member David Miles. Mr. Miles suggested specific rate guidance is dangerous as there are many unforeseeable developments that could change that path. The 10Y is lower by -8bps @ 2.065%.
- French OATs hold modest gains. Today's -3bp drop has pushed the 10Y to a record low 1.105%.
- Peripheral yields are at record lows with Italy's 10Y -7bps @ 2.225% and Spain's 10Y -9bps @ 2.035%.
Dovish Draghi Drops Euro:
- The Dollar Index trades on session highs near 88.20.
- The early strength has action contending with its best close since June 2010.
- EURUSD is -115 pips @ 1.2420 after another dovish speech by ECB President Mario Draghi, which suggested more easing would help the region's economy. The single currency is testing the November lows in the 1.2400 area, and a breakdown would push action to fresh 27-month lows.
- GBPUSD is -30 pips @ 1.5660 as action lingers near 14-month lows. Sterling saw little reaction to the larger than expected public sector net borrowing (GBP7.1 bln actual v. GBP6.9 bln expected) print, and remains trapped in the 1.5600/1.5700 range that has been in place for the past week.
- USDCHF is +100 pips @ .9680 as trade flirts with its best level since May 2013. A quiet day for news and data in Switzerland has kept action closely tied to the euro.
- USDJPY is -15 pips @ 118.05 after Prime Minister Shinzo Abe dissolved parliament. The pair slid to a low of 117.35, but has recovered after the China rate cut as money moved into riskier assets.
- AUDUSD is +80 pips @ .8700 as trade holds just off session highs. The hard currency has been supported by the People's Bank of China rate cut, and has reclaimed the lower end of the .8650/.8850 range that had been in place throughout October. USDCNY jumped to 6.1233.
- USDCAD is -20 pips @ 1.1280 as trade contends with its worst close since the end of October. A flush below 1.1250 puts 1.1200 support and the 50 dma in play.
Treasuries Surrender Gains After China Rate Cut:
- Treasuries press session lows ahead of the cash open.
- The complex surrendered its early gains in response to China's interest rate cut. The PBOC lowered its deposit rate 25bps to 2.75% and its 1Y lending rate 40bps to 5.60%.
- Overnight action remained lackluster with yields trapped in their usual 3bp range.
- Up front, the 2Y is +2.1bps @ 0.521%. The yield probed 0.500% support in early action, but was once again unable to break below the level.
- In the belly, the 5Y holds +2.2bps @ 1.646%. Trade is once again testing 1.650% resistance that is guarded by the 50, 100, and 200 dma.
- The 10Y trades 1.6bps @ 2.351%. The benchmark yield is flirting with the upper bound of the 2.300%/2.350% range that has been in place over the past couple of weeks.
- At the long end, the 30Y is +0.1bps @ 3.054%. The yield on the long bond remains near the midpoint of the 3.00%/3.100% range that has been home to action for the past month.
- A slightly flatter curve is in the works as the 2-10-yr spread trades 183bps.
- Precious metals are bid with gold +$4 @ $1195 and silver +$0.15 @ $16.29.
- Data: None.
Yields Slip, Remain Range-Bound:
- Treasuries booked small gains amid a choppy trade.
- The complex caught an overnight bid in response to the weak European PMI data and rallied to its best levels of the day as the first batch of U.S. economic data cross the wires.
- Initial (291K actual v. 285K expected) and continuing (2330JK actual v. 2380K expected) claims were mixed while both CPI (0.0% actual v. 0.1% expected) and core CPI (0.2% actual v. 0.1% expected) saw hotter than anticipated results.
- Maturities chopped around near session highs ahead of the second batch of economic data, and quickly came under pressure as those numbers were released.
- Existing home sales (5.26M actual v. 5.17M expected), Philly Fed (40.8 actual v. 18.3 expected), and leading indicators (0.9% actual v. 0.6% expected) all outpaced estimates by a wide margin.
- The complex would press to session lows near the unchanged line into the lunchtime hour before the strong 30Y TIPs auction ignited a short-covering rally.
- A choppy trade would ensue for the remainder of the session.
- Today's action was unable to break yields out of the ranges that have been in place over the past several weeks.
- Up front, the 2Y finished -1.7bps @ 0.500%. Action closed on the lower bound of the 0.500%/0.550% range that has held up throughout November.
- In the belly, the 5Y eased -1.5bps to 1.624%. The yield has been stuck between 1.600%/1.650% for more than three weeks.
- The 10Y slipped -1.6bps to 2.335%. The benchmark yield has spent most of November in a tight range between 2.300% and 2.350%.
- Buying at the long end pushed the 30Y down -1.4bps to 3.053%. A lackluster trade over the past month has kept the yield bottled up between 3.000% and 3.100%.
- The yield curve finished unchanged @ 183.5bps.
- Precious metals saw a mixed session as gold added +$1 to $1195 and silver slid -0.06 to $16.23.
- Data: None.
Dollar Drifts Little Changed:
- The Dollar Index drifts little changed near 87.60.
- The greenback has tested both the upper and lower bounds of its recent 87.50/88.00 range, but remains unable to break out.
- EURUSD is flat @ 1.2550 after recouping its overnight losses. The single currency tested 1.2500 following another round of dismal PMI data, but buyers once again stepped in to defend the support level. ECB head Mario Draghi speaks tomorrow in Frankfurt.
- GPBUSD is +25 pips @ 1.5705 as the bulls look to put in a second day of gains following five straight losing sessions. Sterling has been boosted in today's trade by the better than expected retail and CBI Industrial Order Expectations data. A move through 1.5830 puts the key 1.6000 level and the 50 dma in focus. Britain's public sector net borrowing is due out tomorrow.
- USDCHF is +5 pips @ .9575 amid a choppy trade. Support in the .9550 area remains in focus as the 50 dma provides additional support to the area.
- USDJPY is -5 pips @ 117.90 after seeing a sharp reversal off seven-year highs. The pair rushed to a test of the 119.00 level after Japan announced its 28th consecutive trade deficit, but quickly slid off the level as a risk off trade took hold in response to the weak European PMI data. Today's potential spinning top pattern on a daily chart is problematic to the bull case.
- AUDUSD is +25 pips @ .8640 as action presses session highs. The hard currency tested key support in the .8550 area following China's HSBC Flash Manufacturing PMI miss, but trade bounced off the level and has been trending higher. The bulls would like to reclaim the .8650 area, putting trade back into the recent .8650/.8850 range.
- USDCAD is -40 pips @ 1.1300 as trade tests support in the area. The pair saw an early lift above 1.1350, but reversed lower after Canada's strong wholesale sales data. Canadian data scheduled for tomorrow is limited to CPI.