Treasurys Rally with Mixed Economic Data and Declining US Dollar

Service Data Impresses, Labor Statistics Mixed  This morning the Institute for Supply Management (ISM) reported a 57.2 reading for its December non-manufacturing index, matching the previous month’s level and beating median forecasts of 56.8.  Growth in the service sector remained at its highest since October 2015, led by robust measures of new orders (61.6) and business activity (61.4).  Weighing down on the index were service backlog orders, export orders, and employment, all of which reported MoM declines.

Investors received mixed signals from labor data released today, beginning with a weak ADP employment report, which estimated private payroll growth for December at 153,000, well below market expectations of 172,000.  Countering the soft report, weekly initial jobless claims were presented at eight-week lows of 235,000, significantly less than median projections of 260,000 and improving from the previous week’s revised level of 263,000.  The overall figure remains in-line with year-end expectations of reduced firings as the labor market tightens.  Tomorrow, the Labor Department’s release of nonfarm payroll data serves to provide a more detailed picture of the employment situation, with a 180,000 monthly increase in jobs projected.        

US Dollar Falls as Treasurys Rally   
Impacted by a “gradual” Fed rate-hike outlook along with government intervention in China, the US dollar is experiencing its largest drop in six months.  As detailed in the minutes from December’s FOMC meeting, Fed officials remained firm in their projections for steady rate increases in the short-term, despite acknowledging the potential for increased inflation.  The overall tempered tone presented in the report has many investors second-guessing the effect of President-elect Donald Trump’s future policies, with both Treasurys and gold rallying on the day as the dollar falls.  Treasury yields are currently down 3-7 basis points across the curve while the Dollar Spot Index has tumbled 1.1% on the day.  The yield on the 10-year note has now shifted back down towards pre-December FOMC meeting levels, at 2.37%.

Also driving the greenback lower, currency tightening measures recently instated by Chinese policy makers have pushed the value of the offshore yuan to its largest two-day gain in more than six years.  By closely monitoring the conversion of yuan holdings into foreign currencies by its citizens and placing stricter requirements for cross-border transactions by banks, Chinese authorities are attempting to stem the recent depreciation in currency driven by capital outflows and concerns over future trade policies with the US.  The offshore yuan is up 0.5% against the dollar on the day after rising 1.4% yesterday.