3:44 pm - The Week in Review:
The Week Ahead
- Treasuries mostly lost ground this week as the Fed finally announced the long-awaited taper of its bond-buying program.
- Wednesday's FOMC Statement indicated the Fed will trim its asset purchases to $75 bln per month ($40 bln Treasury securities, $35 bln MBS) from the previous $85 bln per month ($45 bln Treasury securities, $40 bln MBS) with further reductions to the program being 'data dependent.'
- This week's economic data was mostly better than expected with Friday's GDP - Third Estimate (4.1% actual v. 3.6% expected) being a welcome surprise and Philadelphia Fed (7.0 actual v. 5.0 expected), housing starts (1091K actual v. 950K expected), building permits (1007K actual v. 983K expected), productivity (3.0% actual v. 2.7% expected), and industrial production (1.1% actual v. 0.4% expected) posting notable beats.
- Data misses were few and far between as just Empire Manufacturing (1.0 actual v. 5.0 expected) and existing home sales (4.90 mln actual v. 5.00 mln expected) fell short of expectations.
- Tuesday's strong $32 bln 2y note auction drew 0.345% and a solid 3.77x bid/cover. A light indirect bid (21.5%) was offset by the strong showing from directs (30.2%). Primary dealers were left with 48.3% of the supply.
- Wednesday saw a terrible $35 bln 5y note auction. The auction drew 1.600% and a weak 2.42x bid/cover as both indirect (25.8%) and direct (11.8%) bids were well below their 12-auction averages. The disappointing results were expected as it seems no one wanted to step in ahead of this afternoon's FOMC rate decision.
- Thursday's $29 bln 7y note auction was average, drawing 2.385% and a 2.45x bid/cover. Primary dealers took down a slightly better than average 41.7%.
- Selling up front ran the 2y yield above 0.400% for the first time in three months, but action slipped to 0.374% (+5bps on the week) by Friday's close.
- This week's selling had the biggest impact on the belly of the curve. The 5y surged +16bps to end the week @ 1.670%. Early selling on Friday ran the yield up to 1.700%, but buyers emerged as the yield tested resistance dating back to the September highs. The yield is +18bps from Tuesday's pre-taper close.
- The 10y tacked on 5bps this week, closing @ 2.887%. The benchmark yield tested 2.950% resistance early in the day on Friday, but ended considerably below that level.
- The 30y bond was the lone advancer this week as buyers moved aggressively into the long end following Wednesday's taper. The 30y slipped -3bps for the week, and ended Friday's session -13bps from Wednesday's post-taper high.
- A flatter curve developed as the 2-10-yr spread tightened to 251.5bps.
- Monday's data includes personal income and spending, PCE Prices - Core (8:30), and Michigan Sentiment - Final (9:55).
- Tuesday will see the weekly MBA Mortgage Index (7), durable orders, durable orders -ex transportation (8:30), FHFA Housing Price Index (9), and new home sales (10). U.S. equity markets will close at 1pm ET and the U.S. Treasury market will close at 2pm ET for Christmas Eve.
- Markets are closed Wednesday in observance of Christmas Day.
- Thursday's data is limited to initial and continuing claims (8:30).
- There is no data on Friday.
2:22 pm - Dollar Hovers Little Changed: The Dollar Index tested session highs near 80.80 following this morning's strong Q3 GDP - Third Estimate, but was unable to pierce and then reversed to session lows at 80.40. The greenback has recovered most of its losses, and now holds little changed near 80.60.
- EURUSD is +10 pips @ 1.3670 as trade has been able to shake off S&P's downgrade of the European Union to 'AA+' from 'AAA.' The rating agency cited 'overall weaker creditworthiness of the EU's member states' for the decision. Post-announcement selling dropped action to 1.3625, but the pair found support at the level and managed to recover most of its losses.
- GBPUSD is -25 pips @ 1.6345 as trade pushes lower for a second session. Today's selling comes after both the current account balance (-GBP20.7 bln actual v. -GBP13.9 bln expected, -GBP6.2 bln previous) and public sector net borrowing (GBP14.8 bln v. GBP6.6 bln expected) fell short of estimates. The 1.6250 area is home to some important support, and is helped by the 50 dma (1.6182).
- USDCHF is -25 pips @ .8955 as trade has given up its early gains. The pair climbed probed the .9000 level following this morning's strong U.S. GDP report, but has reversed to session lows. Many will continue to watch .8850 as that area corresponds with levels last seen in November 2011.
- USDJPY is -15 pips @ 104.05 as trade pulls back for a second day. The pair touched a session high of 104.65 even after the Bank of Japan opted to keep its asset purchase program unchanged, and has run into a wave of selling throughout the U.S. session. Minor support rests in the 103.50 area. Japanese banks are closed for the Emperor's Birthday.
- AUDUSD is +55 pips @ .8920 as buyers remain in control for a second session. A quiet day for data and news down under has favored the bulls as action looks at another test of the key .8950 level.
- USDCAD is +5 pips @ 1.0670 as action has given up virtually all of the early gains. The pair surged to almost 1.0740 in the wake of today's mostly disappointing CPI and retail sales data, but is now holding just off the lows. Today's developments do not bode well for the bulls. The 1.0575/1.0600 area provides the first level of meaningful support. Canada's GDP will cross the wires on Monday.
12:41 pm - Afternoon Update: 2y unch @ 99 23/32...3y -01/32 @ 99 22/32...5y -01/32 @ 99 07/32...7y +06/32 @ 100 07/32...10y +11/32 @ 98 22/32...30y +1 05/32 @ 98 09/32...EURUSD +20 pips @ 1.3680...GBPUSD -25 pips @ 1.6345...USDJPY -15 pips @ 104.05...USDCHF -25 pips @ .8955...AUDUSD +55 pips @ .8915...USDCAD unch @ 1.0665
12:12 pm -
Treasuries Trade Mixed:
- Treasuries hold just off their best levels of the session.
- Outperformance continues at the long end as the 30y bond sports a +29/32 advance. The solid bid has pushed the 30y down -4bps to 3.860% as action probes support that has been in place throughout the month of December.
- A modest bid in 10s briefly pushed the benchmark yield below 2.900%, but action has so far been unable to break support in the area. Early weakness saw the 10y test the September highs just shy of 3.000%.
- The 5y continues to lag its peers as today's selling has the yield +2bps @ 1.665%. The yield saw an early test of the 1.700% level, but its stay was brief.
- A flatter curve has developed as the 2-10-yr spread trades 253.5bps.
- Precious metals are on their highs with gold +$12 @ $1206 and silver +$0.27 @ $19.46.
11:54 am - Risk On Leads Causes Dollar Fade: The Dollar Index pressed to the 80.80 area before seeing a sharp reversal. The DXY jumped to session highs after the Q3 GDP number was revised higher, but it quickly gave up those gains and tumbled back to 80.40. The DXY found support at that level and has recovered some of those losses. Volume continues to dry up though as we edge closer to the holiday week. 80.50 is likely to remain a key straddle level for the dollar during the upcoming sessions. With risk likely to be popular over the final two weeks that should keep some pressure on the greenback, offsetting potential gains from tapering expectations.
- The euro made a run at the 1.3700 level as the dollar reversed lower. The euro had been holding the 1.3620 level for most of the morning before finally seeing a bid. The move is impressive as it came following news that S&P had downgraded the European Union's long -term rating rating to 'AA+' with a 'stable' outlook.
- The pound is cutting out the 1.6320-1.6390 in trade. The U.K. reported a current account deficit of GBP20.7 bln this morning, which was well above the expected GBP13 bln. This will garner interest following comments from the Bank of England that the rise in the pound could impact trade and thus be a key drag on growth. Public sector net borrowing of GBP14 bln was also well above expectations. These figures, coupled with resistance at 1.6400, may provide some headwinds in the coming weeks.
- The yen hit a fresh five-year low against the dollar, touching 105.65. However, the yen would rocket back to the 103.90 level as a risk-on environment took over the market. The Bank of Japan finished up a two-day meeting, but decided against expanding its asset purchase program at this time. The bank did reiterate its 2% inflation target.
- The Canadian dollar tumbled to a fresh 3-year low at 8:30am ET. The U.S. dollar strength helped, but the key for the weakness was the inflation levels in the country continue to run below the Bank of Canada target. CAD hit 1.0730 in early trade, but has been able to recover most of its losses to move back to the 1.0675 area.
09:59 am -
Long Bond Leads:
- Treasuries have reversed to their best levels of the session with significant outperformance taking place at the long end.
- The 30y bond trades +30/32, good for a -4.5bp move in yield to 3.855%. The early advance has the yield on the long bond pressing support in the 3.850% area that has held since the beginning of December.
- A more modest bid in 10s has the benchmark yield off -1bp near 2.915% after early weakness produced a test of the 2.950% level. Any close above 2.979% would mark the highest since August 2011.
- Sellers continue to hammer away at shorter durations as those maturities outperformed ahead of the taper. The 5y is up another +2.6bps @ 1.670%, and is +20bps since Tuesday's pre-taper close.
- Traders are also taking note of action in 2s as early selling caused the 2y to tick above 0.400% for the first time in three months. Current action has the 2y little changed @ 0.378%.
- A flatter curve has taken hold as the 2-10-yr spread trades 253.5bps.
- Precious metals hold slim gains with gold +$1 @ $1195 and silver +$0.02 @ $19.21.
08:38 am - Data Reaction:
- Treasuries are pressing session lows following the strong Q3 GDP - Third Estimate (4.1% actual v. 3.6% expected).
- Traders are taking note of the 2y, which is up another +1.5bps @ 0.390%.
- Selling continues to have the biggest impact on the 5y, +5bps @ 1.694%, with action climbing to a fresh three-month high.
- A +3bp advance in the 10y has the benchmark yield near 2.955%. The yield has not printed 3.000% during U.S. trade since August 2011.
- Outperformance continues at the long end with the 30y -0.7bps @ 3.894%. Action continues to hover just below the recent highs.
- A steeper curve persists as the 2-10-yr spread trades 257bps.
- Precious metals have slumped to their lows with gold -$2 @ $1191 and silver unch @ $19.18.
08:14 am - European Yields:
- European yields are ticking higher after S&P downgraded its European Union rating to 'AA+' from 'AAA,' citing 'overall weaker creditworthiness of the EU's member states' for the decision.
- German Bunds hold small losses following the mixed PPI (-0.1% MoM actual v. 0.0% MoM expected) and GfK German Consumer Climate (7.6 actual v. 7.4 expected, 7.4 previous) data. A +1bp uptick has the 10y @ 1.890.
- UK Gilts are slipping after today's mostly disappointing data. The latest current account balance reading showed a wider than expected deficit (GBP20.7 bln actual v. GBP13.9 bln expected, GBP6.2 bln previous) and public sector net borrowing jumped to GBP14.8 bln (GBP6.6 bln expected). Q3 Final - GDP was also released, posting an in-line 0.8% QoQ. Light selling has the 10y +2bps @ 2.983%.
- Spanish Bonos are lower following word that the main offices of Prime Minister Mariano Rajoy's People's Party were raided as part of an ongoing investigation into the use of party funds. A +4bp advance has the 10y @ 4.160%.
- Italian BTPs are lower as members of parliament review the 2014 budget. A 'confidence' vote on the budget has passed the Lower House, and is scheduled for the Upper House on Monday. The 10y is +4bps @ 4.125%.
07:30 am - Dollar Sees Early Bid: The Dollar Index holds small gains as action looks to retake the 80.70 area. An overnight bid lifted trade to a test of the 80.80 area, but selling over the course of early morning trade dropped action back down to the flat line near 80.60.
- EURUSD is -10 pips @ 1.3650 as trade has mostly shrugged off word of S&P's downgrade of the European Union to 'AA+' from 'AAA,' citing 'overall weaker creditworthiness of the EU's member states' for the move. The single currency dipped to 1.3625 following the announcement, but buyers emerged at the level in defense of the support helped by the 50 dma. Data out overnight was mixed as German PPI posted a tame -0.1% MoM (0.0% MoM expected) and GfK German Consumer Climate ticked up to 7.6 (7.4 expected, 7.4 previous).
- GBPUSD is -40 pips @ 1.6330 as sellers remain in control for a second session. Today's weakness comes following mostly disappointing data out of the UK as the current account deficit widened to GBP20.7 bln (GBP13.9 bln expected, GBP6.2 bln previous) and public sector net borrowing jumped to GBP14.8 bln (GBP6.6 bln expected). Q3 Final - GDP was also released, posting an in-line 0.8% QoQ. The 1.6250 area is home to decent support.
- USDCHF is +5 pips @ .8985 as trade looks to post a third straight day of gains. The three-day rally has the pair up +130 pips, and has trade nearing resistance in the .9025 area that is aided by the 50 dma.
- USDJPY is +25 pips @ 104.45 after the Bank of Japan made no changes to its asset purchase program at today's meeting. Speculation had been mounting the BOJ would look to further ease conditions as data has mostly disappointed as of late, and citizens ready for a sales tax increase that will go into effect in April. However, the central bank indicated it does not believe the tax increase will crimp the economy. Today's early advance has action trading at a fresh five-year high.
- AUDUSD is flat @ .8865 as action lingers near the August lows. An uneventful session has seen trade trapped in a 30 pip range. USDCNY was little changed @ 6.0718 despite a surge in lending rates. 1W SHIBOR jumped 118bps to 7.654% to lead borrowing costs higher.
- USDCAD is +10 pips @ 1.0675 as trade continues to press the key 1.0700 level. The pair will be one to watch this morning as Canada's CPI and retail sales data is set to cross the wires.
07:03 am -
Treasuries Mixed in Early Trade:
- Treasuries are mixed as participants continue to digest the news the Fed will begin to taper its bond-buying program.
- Overnight selling has the 2y up to 0.381% as action holds near a three-month high.
- Selling remains heaviest in the belly of the curve where the 5y is up another +5bps @ 1.693%. Weakness since Tuesday's close has caused the yield to climb +20bps, closing the gap from December 11/12.
- The 10y is +2bps @ 2.947% as action hovers just below the September closing highs. The 3.000% area remains in focus as a move above there would mark the highest print since July 2011.
- Outperformance can be seen at the long end where the 30y is -1bp @ 3.892%. Action since Tuesday's close has held little changed.
- A slightly steeper curve is in the works as the 2-10-yr spread trades 256bps.
- Precious metals are firm with gold +$1 @ $1995 and silver +$0.16 @ $19.35.
- Data: GDP - Third Estimate (8:30).