The Market Today

Treasury Yields Continue Slide


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

There are no economic reports on today’s calendar.  Bloomberg is scheduled to release its December Survey of Economists.  Fed Governor Waller is slated to speak at the Forecasters Club of New York at 12:00 noon CT.


OTHER ECONOMIC NEWS

Manufacturing Picks Up: Industrial production rose 0.5% in November as gains for mining and manufacturing offset weaker utilities. While the monthly increase was smaller than the 0.6% gain expected, positive revisions to the prior two months left the overall trend on a stronger-than-anticipated trajectory. Manufacturing output rose 0.7% as expected and there were positive revisions to September and October. Production of both durable and nondurable goods rose with strength across many of the underlying industries. Notably, auto-related manufacturing rose 2.2% after jumping 10.1% in October. The prior two months’ gains cut the shortfall in auto production from February 2020 from 16.1% to 5.7%.

PMIs Edge Lower on Slight Growth Slowdown, “Marked” Supply Chain Improvement: Markit’s preliminary PMIs reflected an unexpected slowdown in activity early in December. The manufacturing PMI slipped from 58.3 to 57.8, a fifth monthly decline to its lowest level of the year. The services PMI declined for a second consecutive month and for the sixth time in the last seven reports. The services PMI was the third weakest of the year behind the August and September readings during the delta wave. Markit, however, said that the ”data paint a picture of an economy showing encouraging resilience to rising virus infection rates and worries over the Omicron.” “Business growth slipped only slightly” and a portion of the decline in the headline results was attributed to “a marked easing in the number of supply chain delays, which also helped to take pressure off raw material prices.”

Kansas City Fed’s Index Flattens in December: The Kansas City Fed’s Manufacturing Activity Index was unchanged at 24 in December, disappointing expectations for a 1-point improvement and holding near the low end of a three-quarter range. In the inverse of the Philadelphia Fed’s index released earlier in the day, new orders were stronger while employment cooled. Consistent with that report, however, supplier delivery times showed some improvement while inflation indicators cooled. An index tracking expectations for six months from now posted its sharpest decline since March 2020 to an 11-month low.

Bank of Japan Stays Accommodative: The Bank of Japan announced Friday that it would end a financing program for larger businesses. However, the bank also extended a program aimed at small- and medium-sized firms by six months, kept all of its other accommodation unchanged, and said officials “will not hesitate to take additional easing measures if necessary.” The inflation situation in Japan, as has been the case in recent decades, remains drastically different than in other countries. The statement noted that annual inflation “has been at around 0 percent, mainly due to a rise in energy prices.” In his press conference, Governor Kuroda said, “Each country decides their monetary policy seeking stability in their economy and prices. It’s only natural that there’ll be directional differences.”


TRADING ACTVITY

Treasury Yields Extend Post-Fed Slide as Stocks Continue to Retreat: Stocks had rallied sharply Wednesday after the Fed pivoted towards a quicker and steeper liftoff but left expectations for rates three years from now around 2.00%, not too far above September’s projections and still accommodative compared with an unchanged neutral rate of 2.50%. That U.S. rally fueled a global rally on Thursday that lifted stocks across Asia and pushed the Stoxx Europe 600 up 1.2% by the close. The positive momentum, however, faded during U.S. trading as tech stocks soured and retailers sank, sending the S&P 500 down 0.9% for the day despite gains across most sectors. Equities’ about-face enhanced a move lower for Treasury yields that was briefly interrupted by central bank actions in the U.K. and Europe. The Bank of England raised rates unexpectedly and the ECB announced its plans to winddown emergency asset purchases. Transatlantic yield curves added to overnight gains after the decisions before trimming those moves into the close. As the boost from Europe faded, Treasury yields fell back to new session lows. For the day, the 2-year yield fell 5.0 bps to 0.61%, the 5-year yield declined 8.1 bps to 1.16%, and the 10-year yield slipped 4.6 bps to 1.41%. All three maturities closed below their levels immediately prior to Wednesday’s Fed announcement.

Wrapping up an eventful week for major central banks, the Bank of Japan announced Friday it was maintaining a strongly accommodative posture (more above). After initially sailing upward throughout central bank pivots to more hawkish policy stances, the tide for global equities has turned over the last two days. Following yesterday’s losses in the U.S., stocks slumped across both Asia and Europe on Friday and tech shares continued to lead U.S. futures lower. Continued weakness in equity markets has continued to enhance the bid for safety in sovereign bonds. Trailing larger declines across Europe, Treasury yields were flattening lower just before 7:30 a.m. CT. The 2-year yield was unchanged at 0.61% while the 10-year yield dropped 1.9 bps to 1.39%, its second lowest level since late September.


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