Bond Market Update

Short End Pads August Gain

• U.S. Treasuries finished the week with losses in longer tenors, but the Friday session was largely uneventful ahead of a three-day weekend. Longer tenors lagged from the start after a night that brought a customary end-of-month barrage of data. Japan reported below-consensus Retail Sales (0.3%; expected 1.5%) and Industrial Production (-1.6%; expected -1.1%) for July and cooler-than-expected Tokyo CPI for August (2.6%; expected 2.9%). In Europe, flash August CPI readings from France (0.4%; expected 0.5%), Italy (0.1%; expected 0.2%), and Spain (0.0%; expected 0.1%) were cooler than expected while Germany's CPI report was slightly hotter than expected (0.1%; expected 0.0%). The U.S. session also featured some noteworthy data, though the reaction in the Treasury market was muted with September rate cut expectations remaining firmly in place. The Personal Income/Outlays report was in line with expectations while the University of Michigan's Consumer Sentiment Index weakened to 58.2 (Briefing.com consensus 58.6) from 58.6 in the preliminary reading. The 10-yr note finished where it started with its yield staying inside a two-basis point range through the day while the long bond continued this month's underperformance trend, turning negative for August. It finished below its starting level while the 2-yr note climbed in immediate reaction to the Personal Income/Outlays report, defending its gain into the close. Crude oil returned to $64/bbl, narrowing this week's gain to $0.34, or 0.5%, while the U.S. Dollar Index was little changed for the day and the week, holding just below its 50-day moving average (98.01).
• Yield Check:
  • 2-yr: -2 bps to 3.62% (-7 bps this week; -33 bps in August)
  • 3-yr: UNCH at 3.59% (-5 bps this week; -30 bps in August)
  • 5-yr: UNCH at 3.70% (-6 bps this week; -26 bps in August)
  • 10-yr: +2 bps to 4.23% (-3 bps this week; -13 bps in August)
  • 30-yr: +4 bps to 4.92% (-4 bps this week; +3 bps in August)

• News:
  • A federal judge heard Fed Governor Cook's objection to being fired by President Trump, but the judge has not made a decision yet. Regardless of the outcome, the case is expected to eventually be elevated to the Supreme Court.
  • FHFA Director Pulte has submitted a second criminal referral against Fed Governor Cook, who allegedly categorized an investment property as a second home.
  • Fed Governor Waller spoke last evening, voicing his support for a 25-basis point rate cut in September, adding that he would not support a larger cut unless the August jobs report shows a significant deterioration in the labor market.
  • South Korea's government will issue bonds to pay for its largest budget increase in four years.
  • China Securities Daily warned against speculation on risky stocks under "special treatment" or "probationary" status due to their risk of being delisted.
  • German Chancellor Merz said that there will be no meeting between presidents of Ukraine and Russia.
  • FT reported that British Chancellor Reeves is considering a surcharge on bank profits or a new bank levy to plug a GBP20 bln budget gap.
  • Japan's July Retail Sales rose 0.3% yr/yr (expected 1.5%; last 1.9%), July Industrial Production was down 1.6% m/m (expected -1.1%; last 2.1%), July jobs/applications ratio remained at 1.22 (expected 1.23), July Unemployment Rate fell to 2.3% from 2.5% (expected 2.5%), July Housing Starts were down 9.7% yr/yr (expected -9.9%; last -15.6%), July Construction Orders fell 19.0% yr/yr (last 22.5%). August Tokyo CPI was up 2.6% yr/yr (last 2.9%) and Tokyo Core CPI was up 2.5%, as expected (last 2.9%). August Household Confidence rose to 34.9 from 33.7 (expected 34.2). 
  • South Korea's July Industrial Production was up 0.3% m/m (expected 0.4%; last 1.7%), rising 5.0% yr/yr (expected 3.5%; last 1.6%). July Retail Sales were up 2.5% m/m (last 0.7%). July Service Sector Output rose 0.2% m/m (last 0.5%).
  • Singapore's July Bank Lending reached SGD854.0 bln (last SGD853.3 bln).
  • India's Q1 GDP expanded 7.8% yr/yr (expected 6.6%; last 7.4%). 
  • Australia's July Private Sector Credit was up 0.7% m/m (expected 0.6%; last 0.6%) and Housing Credit was up 0.5% m/m (last 0.5%).
  • Germany's July Import Price Index was down 0.4% m/m (expected -0.3%; last 0.0%), falling 1.4% yr/yr (expected -1.2%; last -1.4%). July Retail Sales were down 1.5% m/m (expected 0.0%; last 1.0%) but up 1.9% yr/yr (expected 2.6%; last 2.4%). August Unemployment decreased by 9,000 (expected 10,000; last 2,000) and Unemployment Rate remained at 6.3%, as expected.
  • France's flash August CPI was up 0.4% m/m (expected 0.5%; last 0.2%), rising 0.9% yr/yr (expected 1.0%; last 1.0%). Q2 GDP expanded 0.3% qtr/qtr, as expected (last 0.1%), growing 0.8% yr/yr (expected 0.7%; last 0.6%). Q2 nonfarm payrolls were up 0.2% qtr/qtr (expected 0.0%; last -0.1%). July PPI was up 0.4% m/m (last -0.1%), rising 0.4% yr/yr (last 0.3%). July Consumer Spending was down 0.3% m/m, as expected (last 0.4%).
  • Italy's Q2 GDP contracted 0.1% qtr/qtr, as expected (last 0.3%) but was up 0.4% yr/yr, as expected (last 0.7%). August CPI was up 0.1% m/m (expected 0.2%; last 0.4%), rising 1.6% yr/yr (expected 1.7%; last 1.7%).
  • Spain's flash August CPI was unchanged m/m (expected 0.1%; last -0.1%), rising 2.7% yr/yr (expected 2.8%; last 2.7%). July Retail Sales were up 4.7% yr/yr (last 6.2%).
• Today's Data:
  • Personal income, bolstered by a 0.6% increase in wages and salaries, increased 0.4% month-over-month in July (Briefing.com consensus: 0.4%) following a 0.3% increase in June, personal spending increased 0.5% month-over-month (Briefing.com consensus: 0.5%) following an upwardly revised 0.4% increase (from 0.3%) in June, the PCE Price Index increased 0.2% month-over-month (Briefing.com consensus: 0.2%) following a 0.2% increase in June, and core PCE inflation, which excludes food and energy, increased 0.3% month-over-month (Briefing.com consensus: 0.3%) following a 0.3% increase in June. On a year-over-year basis, PCE inflation was up 2.6%, versus 2.6% in June, while core PCE inflation was up 2.9%, versus 2.8% in June. The Fed's inflation target is 2.0%.
    • The key takeaway from the report is that it was largely in line with expectations, so the market is apt to stick to its thinking that there will be a rate cut in September even though PCE inflation remains stuck above the Fed's 2.0% target.
  • The final University of Michigan Consumer Sentiment reading for August checked in at 58.2 (Briefing.com consensus: 58.6) versus the preliminary reading of 58.6 and the final reading of 61.7 for July. In the same period a year ago, the index stood at 67.9.
    • The key takeaway from the report is that perceptions about the economy slipped in many aspects, and the weaker sentiment was visible across groups by age, income, and stock wealth.
  • The Chicago PMI hit 41.5 in August (Briefing.com consensus 46.0), down from 47.1 in July.
• Commodities:
  • WTI crude: -0.9% to $64.01/bbl
  • Gold: +1.2% to $3516.20/ozt
  • Copper: +1.1% to $4.59/lb
• Currencies:
  • EUR/USD: +0.2% to 1.1695
  • GBP/USD: UNCH at 1.3507
  • USD/CNH: UNCH at 7.1212
  • USD/JPY: +0.1% to 147.03
• The Week Ahead:
  • Monday: Bond and equity markets closed for Labor Day
  • Tuesday: Final August S&P Global U.S. Manufacturing PMI (prior 53.3) at 9:45 ET and July Construction Spending (Briefing.com consensus 0.2%; prior -0.4%) and August ISM Manufacturing (Briefing.com consensus 48.6%; prior 48.0%) at 10:00 ET
  • Wednesday: Weekly MBA Mortgage Index (prior -0.5%) at 7:00 ET; July Factory Orders (Briefing.com consensus -1.4%; prior -4.8%) and July Job Openings (prior 7.437 mln) at 10:00 ET; and September Beige Book at 14:00 ET
  •  Thursday: August ADP Employment (Briefing.com consensus 69,000; prior 104,000) at 8:15 ET; revised Q2 Productivity (Briefing.com consensus 2.4%; prior 2.4%), revised Q2 Unit Labor Costs (Briefing.com consensus 1.6%; prior 1.6%), weekly Initial Claims (Briefing.com consensus 232,000; prior 229,000), Continuing Claims (prior 1.954 mln), and July Trade Balance (Briefing.com consensus -$64.2 bln; prior -$60.2 bln) at 8:30 ET; final August S&P Global U.S. Services PMI (prior 55.4) at 9:45 ET; August ISM Services (Briefing.com consensus 50.5%; prior 50.1%) at 10:00 ET; weekly crude oil inventories (prior -2.39 mln) and weekly natural gas inventories (prior +18 bcf) at 10:30 ET
  • Friday: August Nonfarm Payrolls (Briefing.com consensus 78,000; prior 73,000), Nonfarm Private Payrolls (Briefing.com consensus 90,000; prior 83,000), Unemployment Rate (Briefing.com consensus 4.3%; prior 4.2%), Average Hourly Earnings (Briefing.com consensus 0.3%; prior 0.3%), and Average Workweek (Briefing.com consensus 34.3; prior 34.3) at 8:30 ET