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The U.S. Treasuries slumped on Monday as oil prices rebounded to new 2016 highs after long-time bear Goldman Sachs said the market had ended almost 2-years of oversupply following global oil disruptions and flipped to a deficit. Also, firmer than expected advance April retail sales figure drove out traders from safe-haven buying. The yield on the benchmark 10-year Treasury note which moves inversely to its price, rose 2bps to 1.729 pct and the yield on the 2-year Treasury bond also jumped 2bps to 0.774 pct by 1230 GMT.
The U.S government bonds have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the Federal Reserve's target. Today, the crude oil prices jumped more than 2 pct after long-time bear Goldman Sachs said the market had ended almost 2-years of oversupply following global oil disruptions and flipped to a deficit. Reuters in its recent report said that supply disruptions from Nigeria, Venezuela, the United States and China triggered a U-turn in the oil outlook of Goldman Sachs, which long warned of overflowing storage and another looming crash in prices. Venezuela's oil production has already fallen by at least 188,000 bpd since the start of the year as PDVSA struggles to make the investment needed to keep output steady. In the United States, crude production has fallen to 8.8 million bpd, 8.4 percent below 2015 peaks as the sector suffers a wave of bankruptcies. And in China, output fell 5.6 percent to 4.04 million bpd in April, compared with the same time last year. The International benchmark Brent futures rose 2.09 pct to $48.83 and West Texas Intermediate (WTI) jumped 2.16 pct to $47.21 by 1230 GMT.
On Friday, the April advance retail sales jumped 1.3 pct m/m, above market expectations for a +0.8 pct m/m, from down 0.3 pct in March. Meanwhile, ex-autos retail sales increased 0.8 pct m/m, above expectations for a 0.5 pct m/m, as compared to revised 0.4 pct m/m increase in March (previous was 0.2 pct m/m). Alongside the solid increase seen in the headline reading, we continue to anticipate broader improvement in consumer activity in the coming months, likely to come hand-in-hand with improvement in employment conditions. Moreover, the April Labor Department producer prices index (PPI) rose 0.2 pct m/m, below market expectations for a +0.3 pct m/m, from down 0.1 pct m/m in March. Meanwhile, PPI ex-food and energy rose 0.1 pct m/m in April, in line with market expectations for a 0.1 pct m/m rise, from unrevised down 0.1 pct m/m reading in March, result.
In addition, the Fed Chair Janet Yellen in a letter to congress said that she expects continued US economic strength and gradual approach to interest rate increases. Said inflation will return to the Federal Reserve's 2 pct goal over time and the Fed will adjust policy if outlook changes unexpectedly. Interestingly, mentioned that she will not completely rule out the use of negative interest rates in some future very adverse scenario.
Last week, the US Initial jobless claims increased +20k to 294k, recoding the highest level since 28 February 2015) for the week ending 7 May, as compared to unrevised 274k reading seen in the week prior, well above expectations for a 267k result. Similarly, the 4-week average was reported at 268.3k, from the unrevised 258.0k reading seen in the week prior. The insured unemployment rate held unchanged at 1.6%. Moreover, April export prices rose 0.5 pct m/m, against market expectation of 0.1 pct m/m, from prior 0.0 pct in March. Yesterday, the wholesale inventories rose 0.1 pct m/m, this comes in below market expectations for a rise of 0.3 pct m/m versus the revised -0.6 pct m/m reading that occurred in February (previous was -0.5 pct m/m). The weaker than expected increase in inventories stemmed from downward pressure seen in durables, which declined 0.1 pct m/m, offset by upward pressure seen from non-durables, which climbed 0.5 pct m/m.
The markets will now focus on greater flow of data this week’s, highlighted by minutes from the April FOMC meeting on Wednesday (1800 GMT), April core CPI (1230 GMT) and Industrial Production (1315 GMT) on Tuesday, May Philadelphia Fed Manufacturing Index on Thursday (1230 GMT). Meanwhile, S&P 500 Futures rose 0.05 pts to 2,044.75 by 1230 GMT.
