Bond Market Update

July CPI Boosts September Rate Cut Odds

• U.S. Treasuries finished Tuesday with losses in longer tenors while the front end outperformed after the release of in-line CPI (0.2%) and Core CPI (0.3%) for July. Treasuries started the day with modest losses across the curve before rallying in immediate reaction to the CPI report. The moves were met with strong resistance in the 10-yr note and the long bond while shorter tenors remained closer to their highs. The rest of the morning featured steady backtracking that briefly sent 10s and 30s to fresh lows for the day while shorter tenors held up better, finding support well above their morning lows. The 2-yr note was the standout, spending the bulk of the session in a sideways range just below its post-CPI high, as September rate cut expectations solidified. Crude oil settled at its lowest level since early June while the U.S. Dollar Index fell 0.4% to 98.11, slipping back below its 50-day moving average (98.16).
• Yield Check:
  • 2-yr: -2 bps to 3.73%
  • 3-yr: -1 bp to 3.71%
  • 5-yr: UNCH at 3.82%
  • 10-yr: +2 bps to 4.29%
  • 30-yr: +4 bps to 4.89%

• News:
  • New Bureau of Labor Statistics chief Antoni said that the monthly release of the Employment Situation report could be suspended but White House press secretary Leavitt said that there are no plans to change the reporting frequency.
  • The Reserve Bank of Australia lowed its cash rate by 25 basis points to 3.60%, as expected. The central bank also lowered its terminal rate forecast to 2.90% from 3.20%.
  • The Asian session went by without any trades in Japan's 10-yr JGB for the first time since March 2023.
  • South Korea's President Lee will meet with President Trump on August 25.
  • Taiwan is seeking to establish a strategic partnership with the U.S. in order to receive a lower tariff rate.
  • Italy is aiming to reduce Chinese investments in strategic companies.
  • The EU is preparing its 19th package of sanctions against Russia.
  • Japan's July M2 Money Stock grew 1.0% yr/yr (expected 0.8%; last 0.9%).
  • India's July CPI was up 1.55% yr/yr (expected 1.76%; last 2.10%).
  • Singapore's Q2 GDP expanded 1.4% qtr/qtr, as expected (last -0.5%), growing 4.4% yr/yr (expected 4.3%; last 4.1%).
  • Australia's July NAB Business Confidence rose to 7 from 5 while Business Survey fell to 5 from 7.
  • Eurozone's August ZEW Economic Sentiment fell to 25.1 from 36.1 (expected 28.1).
  • Germany's August ZEW Economic Sentiment fell to 34.7 from 52.7 (expected 39.5) and ZEW Current Conditions fell to -68.6 from -59.5 (expected -65.0).
  • U.K.'s June Average Earnings Index + Bonus was up 4.6% yr/yr (expected 4.7%; last 5.0%). June three-month employment increased by 238,000 (last 134,000) and June Unemployment Rate remained at 4.7%, as expected. July Claimant Count decreased by 6,200 (expected 19,7000; last -15,500).
• Today's Data:
  • Total CPI increased 0.2% month-over-month, as expected. Core CPI, which excludes food and energy, rose 0.3% month-over-month, also as expected. Those readings left CPI up 2.7% year-over-year, unchanged from June, and core CPI up 3.1% year-over-year, up from 2.9% in June.
    • The key takeaway from the report lurks in the details. The headline readings look good, yet there are enough component indexes exhibiting tariff-induced inflation pressures (i.e., large month-over-month changes) that one can't walk away with an "all-clear" inflation signal from this report. It seems doubtful that all Fed officials will, given the 3.1% year-over-year reading for core CPI.
  • The Treasury Budget for July showed a deficit of $291.1 billion (Briefing.com consensus -$140.0 billion) compared to a deficit of $243.7 billion in the same period a year ago. The July deficit resulted from outlays ($629.6 billion) exceeding receipts ($338.5 billion). The Treasury Budget data are not seasonally adjusted so the July deficit cannot be compared to the June surplus of $27.0 billion.
    • The key takeaway from the report is that it showed a return to a deficit after a surprise surplus in June. Receipts from customs duties totaled $28 billion in July, increasing the year-to-date total to $136 billion.
  • The NFIB Small Business Optimism Index rose to 100.3 in July from 98.6 in June.
• Commodities:
  • WTI crude: -1.3% to $63.17/bbl
  • Gold: -0.2% to $3398.90/ozt
  • Copper: +1.8% to $4.52/lb
• Currencies:
  • EUR/USD: +0.5% to 1.1667
  • GBP/USD: +0.5% to 1.3494
  • USD/CNH: -0.1% to 7.1856
  • USD/JPY: -0.2 to 147.75
• The Day Ahead:
  • 7:00 ET: Weekly MBA Mortgage Index (prior 3.1%)
  • 10:30 ET: Weekly crude oil inventories (prior -3.03 mln)