Bond Market Update

July PPI Offers Unpleasant Surprise

• U.S. Treasuries retreated on Thursday, sending yields from their lowest levels of the week back toward highs from Tuesday. Treasuries followed yesterday's solid advance with a firmly higher start that pressured yields on 5s and shorter tenors to fresh lows for the month, but the entire complex faced heavy selling in reaction to the July PPI report (0.9%; Briefing.com consensus 0.2%), which was a stark contrast to the largely sanguine CPI report for July (0.2%; Briefing.com consensus 0.2%) that bolstered hopes for a September rate cut. Rate cut expectations dipped today, but the market remains all but certain that a 25-basis point rate cut will be announced on September 17. Still, the hot PPI report damaged the case for a 50-basis point rate cut with both St. Louis Fed President (FOMC voter) Musalem and San Francisco Fed President (non-voter) Daly saying that current data does not necessitate a larger cut. Treasuries continued widening their losses through the morning, spending the afternoon at their lowest levels of the day. Crude oil bounced off its lowest level since early June while the U.S. Dollar Index rose 0.4% to 98.26, reclaiming its 50-day moving average (98.13).
• Yield Check:
  • 2-yr: +5 bps to 3.74%
  • 3-yr: +4 bps to 3.70%
  • 5-yr: +5 bps to 3.82%
  • 10-yr: +6 bps to 4.29%
  • 30-yr: +6 bps to 4.88%

• News:
  • Norway's central bank left its policy rate at 4.25% and hinted at some easing later this year.
  • Lenovo CEO said that the tariff impact has been limited and that his outlook for fiscal 2026 has improved.
  • South Korea's July Import Price Index was down 5.9% yr/yr (last -6.2%) and Export Price Index was down 4.3% yr/yr (last -4.5%).
  • India's July WPI Inflation was down 0.58% (expected -0.30%; last -0.13%). July trade deficit reached $27.35 bln (last deficit of $18.78 bln).
  • Australia's July Employment increased by 24,500 (expected 25,300; last 1,000) and full employment increased by 60,500 (last -36,700). July Unemployment Rate fell to 4.2% from 4.3%, as expected, and Participation Rate remained at 67.0% (expected 67.1%).
  • Eurozone's Q2 GDP expanded 0.1% qtr/qtr, as expected (last 0.6%), growing 1.4% yr/yr, as expected (last 1.5%). Q2 Employment increased by 0.1% qtr/qtr (expected 0.2%; last 0.2%), rising 0.7% yr/yr (expected 0.6%; last 0.7%). June Industrial Production was down 1.3% m/m (expected -0.9%; last 1.1%) but up 0.2% yr/yr (expected 1.7%; last 3.1%).
  • U.K.'s Q2 GDP expanded 0.3% qtr/qtr (expected 0.1%; last 0.7%), growing 1.2% yr/yr (expected 1.0%; last 1.3%).
  • France's July CPI was up 0.2% m/m, as expected (last 0.4%), rising 1.0% yr/yr, as expected (last 1.0%).
  • Swiss July PPI was down 0.2% m/m (expected 0.0%; last -0.1%), falling 0.9% yr/yr (last -0.7%).
• Today's Data:
  • The index for final demand jumped 0.9% month-over-month in July (Briefing.com consensus: 0.2%) following an unchanged reading in June. The index for final demand, excluding food and energy, also increased 0.9% month-over-month (Briefing.com consensus: 0.2%) following an unchanged reading in June. With these readings, the index for final demand is up 3.3% year-over-year, versus 2.4% in June, while the index for final demand, excluding food and energy, is up 3.7%, versus 2.6% in June.
    • The key takeaway from the report, other than that it completely flies in the face of the relatively friendly CPI report, is that wholesale prices rose appreciably across all stages of production and for both goods and services. The concern will be that this inflation will register in the PCE Price Index and keep the Fed from being as aggressive with its rate cut approach as had been envisioned following the CPI data.
  • Initial jobless claims for the week ending August 9 decreased by 3,000 to 224,000 (Briefing.com consensus: 228,000), while continuing jobless claims for the week ending August 2 decreased by 15,000 to 1.953 million.
    • The key takeaway from the report is still the same. Layoffs are low, but finding a new job, if laid off, is taking longer.
  • Weekly natural gas inventories increased by 56 bcf after increasing by 7 bcf a week ago.
• Commodities:
  • WTI crude: +2.1% to $63.95/bbl
  • Gold: -0.7% to $3383.20/ozt
  • Copper: -0.4% to $4.48/lb
• Currencies:
  • EUR/USD: -0.5% to 1.1644
  • GBP/USD: -0.3% to 1.3534
  • USD/CNH: UNCH at 7.1808
  • USD/JPY: +0.4% to 147.84
• The Day Ahead:
  • 8:30 ET: July Retail Sales (Briefing.com consensus 0.5%; prior 0.6%), Retail Sales ex-auto (Briefing.com consensus 0.3%; prior 0.5%), August Empire State Manufacturing (Briefing.com consensus 0.0; prior 5.5), and July Import/Export Prices
  • 9:15 ET: July Industrial Production (Briefing.com consensus -0.1%; prior 0.3%) and Capacity Utilization (Briefing.com consensus 77.5%; prior 77.6%)
  • 10:00 ET: June Business Inventories (Briefing.com consensus 0.1%; prior 0.0%) and preliminary August University of Michigan Consumer Sentiment (Briefing.com consensus 61.3; prior 61.7)
  • 16:00 ET: June Net Long-Term TIC Flows (prior $259.4 bln)