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US Treasuries Fell as China Signaled to Reduce Purchases Print E-mail
ONG Focus | Insights | Written by Oil N' Gold | Thu Jan 11 18 00:13 ET

The US Treasury market remained under the spotlight. The Treasury sold US$20B of 10-year notes at the highest yield of 2.579% since July 2014. Yet, what directed the market movement was the news citing that Chinese officials have recommended lowering or stopping purchases of US government bonds. 10-year yields rallied to a 10-month high of 2.597% at one point before ending the day at 2.549%. 2-year yields climbed modestly higher to 1.976% at close. US dollar was mixed against major currencies while Wall Street took a breather after rallying from highs to highs. The DJIA and S&P 500 indices slipped -0.07% and -0.11% respectively. In the commodity sector, crude oil prices strengthened further after a bigger than expected decline in US inventory. The front-month WTI crude oil contract gained +0.97% while the Brent contract was up +0.55% for the day. The latter is about to test US$ 40/ bbl.

As the US' biggest foreign creditor, a Bloomberg report suggesting that China might be trimming or even halting its purchases of US Treasuries is a shock to the market. However, no details have been given. Indeed, reduction of US bond buying has on and off been used as China's threat in response to the US' complaints about trade deficits. Whether China would put its words into actions remains uncertain.

On oil inventory, the US Energy Information Administration (EIA) shows that total crude oil and petroleum products stocks declined -5.52 mmb to 1219.75 mmb in the week ended January 5. Crude oil inventory plunged -4.95 mmb to 419.52 mmb as stock declined in 4 out of 5 PADDs. PADD 2 and 3 inventories fell -3.19 and -2.56 mmb for the week, respectively. Cushing stock dropped -2.4 mmb to 46.58 mmb. Utilization rate fell -1.4% to 95.3%. Meanwhile, crude production dropped -0.29M bpd to 9.49M bpd for the week. For refined oil products, gasoline inventory soared +4.14 mmb to 237.32 mmb although demand gained +1.9% to 8.81M bpd. Production fell -1.62% to 9.53M bpd while imports plunged -24.36% to 0.26M bpd during the week. Distillate inventory added +4.25 mmb to 143.09 mmb although demand increased 1.87% to 3.66M bpd. Production fell -5.38% to 5.29M bpd while imports rose +35.66% to 0.18M bpd during the week.

Comments from Fed presidents revealed the divergent views within the FOMC. Chicago Fed president Charles Evan, non-voter, noted that he does not "see any evidence of inflation moving up really fast, or even moving up enough". Dallas Fed president Robert Kaplan, non-voter, affirmed that he favoured three hikes this year. He added that "cyclical pressures are building substantially, and they will offset some of the structural headwinds". St Louis Fed president James Bullard, non-voter, suggested that the Fed should consider targeting inflation above 2% for a period.

On the dataflow, UK IP growth eased markedly to +2.5% y/y in November, from an upwardly revised +4.3% a month ago. This came in better than expectations of +1.8%. Manufacturing production expanded +3.5%, beating consensus of +2.85 but weaker than the upwardly revised +4.7% growth in October. For the day ahead, US headline PPI probably slowed to +3% y/y in December from +3.1% a month ago. Core PPI might have accelerated to +2.5% y/y in December, from +2.4% in the prior month. Separately, initial jobless claims probably slowed to 248K in the week ended January 6, from 250K in the prior week. The ECB would release the minutes for the December meeting.

 

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