Bond Market Update

Longer Tenors Pace Thursday Dip

• U.S. Treasuries retreated on Thursday, lifting yields back to their closing levels from Monday. Treasuries started the day near their flat lines, but selling pressure began building once the market received the PPI report for August, which was similar to yesterday's CPI report, as the headline reading (0.2%) matched the Briefing.com consensus while core PPI rose 0.3% (Briefing.com consensus 0.2%). July readings were revised lower to reflect a 0.2% decrease in core PPI (from 0.0%) and no change in the headline reading (from 0.1%). The market resisted some of the initial post-PPI selling pressure, but slipped to fresh lows around 10:00 ET, adding to its losses through the rest of the morning. Treasuries reached their lowest levels in immediate reaction to today's $22 bln 30-yr bond sale, which made for a mediocre finish to this week's otherwise strong slate of note and bond auctions. However, Treasuries bounced off their post-auction lows, recovering some of their losses in the afternoon. Overseas, the European Central Bank lowered its deposit facility rate by 25 bps and its main refinancing rate by 60 bps, which was expected. Crude oil built on yesterday's bounce off its lowest level of the year while the U.S. Dollar Index fell 0.3% to 101.37.
• Yield Check:
  • 2-yr: UNCH at 3.65%
  • 3-yr: +1 bp to 3.48%
  • 5-yr: +2 bps to 3.47%
  • 10-yr: +3 bps to 3.68%
  • 30-yr: +3 bps to 4.00%

• News:
  • The International Energy Agency lowered its 2024 global oil demand growth forecast to 903,000 barrels per day from 970,000 barrels.
  • The EU is reportedly looking to repurpose up to EUR350 bln of coronavirus-related debt.
  • The Bank of England noted that the implementation of Basel 3.1 rules will have a very small impact on capital requirements of British banks.
  • Bank of Japan policymaker Tamura said that rate hike expectations are too low, adding that he sees a neutral rate around 1.00%.
  • There was some speculation that the People's Bank of China will lower its short-term reverse repurchase rate on Friday ahead of next week's mid-autumn festival.
  • Japan's August PPI was down 0.2% m/m (expected 0.0%; last 0.5%) but up 2.5% yr/yr (expected 2.8%; last 3.0%). Q3 BSI Large Manufacturing Conditions rose to 4.5 from -1.0 (expected -2.5).
  • Hong Kong's Q2 Industrial Production was up 0.7% yr/yr (last 1.8%).
  • Australia's September MI Inflation Expectations slowed to 4.4% from 4.5%.
  • New Zealand's August Electronic Card Retail Sales were up 0.2% m/m (last -0.1%) but down 2.9% yr/yr (last -4.9%). August FPI was up 0.2% m/m (last 0.4%).
  • Germany's August WPI was down 0.8% m/m (expected 0.1%; last 0.3%), falling 1.1% yr/yr (last -0.1%). 
  • Italy's Q2 Unemployment Rate fell to 6.8% from 7.2% (expected 7.1%).
  • Spain's August CPI was unchanged m/m, as expected (last -0.5%), rising 2.3% yr/yr (expected 2.2%; last 2.8%). August Core CPI was up 2.7% yr/yr, as expected (last 2.8%).
• Today's Data:
  • Initial jobless claims for the week ending September 7 increased by 2,000 to 230,000 (Briefing.com consensus 229,000). Continuing jobless claims for the week ending August 31 increased by 5,000 to 1.850 million.
    • The key takeaway from the report is that initial jobless claims remained fairly steady, underscoring the point that the labor market isn't suffering a material and rapid erosion that would challenge the soft landing view. The Producer Price Index for August was up 0.2% month-over-month (Briefing.com consensus 0.2%) following a downwardly revised 0.0% (from 0.1%) in July.
  • The Producer Price Index, excluding food and energy, was up 0.3% month-over-month (Briefing.com consensus 0.2%) following a downwardly revised 0.2% decline (from 0.0%) in July. On a year-over-year basis, the Producer Price Index was up 1.7%, versus 2.1% in July, and the Producer Price Index, excluding food and energy, was up 2.4%, versus 2.3% in July.
    • The key takeaway from the report is the recognition that inflation at the wholesale level is moderating, which lessens concerns about heightened pass-through pressures to the consumer.
  • The Treasury Budget for August showed a deficit of $380.1 billion compared to a surplus of $89.3 billion in the same period a year ago. August has been a deficit month 69 times out of 70 fiscal years because there are no major tax due dates this month. The August deficit resulted from outlays ($687 billion) exceeding receipts ($307 billion). The Treasury Budget data is not seasonally adjusted so the August deficit cannot be compared to the July deficit.
    • The key takeaway from the report is that the U.S. government continues to run large budget deficits, which necessitates a large amount of Treasury issuance for government funding. 
  • $22 bln 30-year Treasury bond auction results (prior 12-auction average):
    • High yield: 4.015% (4.457%). 
    • Bid-to-cover: 2.38 (2.39).
    • Indirect bid: 68.7% (65.4%).
    • Direct bid: 15.7% (17.9%).
• Commodities:
  • WTI crude: +2.5% to $68.97/bbl
  • Gold: +1.5% to $2580.90/ozt
  • Copper: +1.0% to $4.19/lb
• Currencies:
  • EUR/USD: +0.5% to 1.1063
  • GBP/USD: +0.5% to 1.3104
  • USD/CNH: UNCH at 7.1243 
  • USD/JPY: -0.1% to 142.06
• The Day Ahead:
  • 8:30 ET: August Import Prices (prior 0.1%), Import Prices ex-oil (prior 0.1%), Export Prices (prior 0.7%), and Export Prices ex-agriculture (prior 1.0%)
  • 10:00 ET: Final September University of Michigan Consumer Sentiment (prior 67.9)