Bond Market Update

Sliding Into September

• U.S. Treasuries began the Labor Day-shortened week with losses across the curve, though intraday action saw all tenors rise off their opening lows. Treasuries slumped out of the gate with longer tenors pacing the selling after a night that also featured selling in other sovereign debt with the U.K.'s Gilt yields reaching levels not seen in nearly 30 years. The ongoing weakness was owed to growing concerns about the U.K.'s fiscal standing while the conversation back at home was focused on some potential tariff uncertainty. An Appellate Court ruled against most of President Trump's tariffs, deeming them invalid from September 16. However, the case is expected to be escalated to the Supreme Court, so the final outcome remains unclear. Treasuries reached their lows immediately after the start, followed by a slow rebound into the late morning. The bounce found resistance well before the market made it back to little changed, returning action to the midpoint of today's range. Economic data released today showed a contractionary reading of the ISM Manufacturing Index for August (48.7%; Briefing.com consensus 48.6%), though the reading was a touch better than expected. Separately, the final reading of the ISM Manufacturing Index (53.0) remained in expansionary territory while the Construction Spending report for July (-0.1%; Briefing.com consensus 0.2%) showed an unexpected dip in activity. Crude oil returned to its 50-day moving average (65.65) while the U.S. Dollar Index jumped 0.6% to 98.38, rising back above the 50-day moving average (98.01) of its own.
• Yield Check:
  • 2-yr: +4 bps to 3.66%
  • 3-yr: +4 bps to 3.63%
  • 5-yr: +4 bps to 3.74%
  • 10-yr: +5 bps to 4.28%
  • 30-yr: +5 bps to 4.97%

• News:
  • The Atlanta Fed's GDPNow forecast for Q3 GDP was lowered to 3.0% from 3.5% in the previous estimate.
  • Treasury Secretary Bessent said that a housing emergency could be declared in the fall.
  • South Korea is expected to gradually increase defense spending and President Lee called for bold steps to boost the potential growth rate.
  • Japan's top trade negotiator said that there is no disagreement with the U.S. after last week's visit to Washington was canceled.
  • European Central Bank policymakers Schnabel and Simkus said that there is no current need for a rate cut.
  • Japan's August Monetary Base was down 4.1% yr/yr (expected -3.5%; last -3.9%).
  • South Korea's August CPI was down 0.1% m/m (expected 0.2%; last 0.2%), rising 1.7% yr/yr (expected 2.0%; last 2.1%).
  • Australia's Q2 Current Account deficit reached AUD13.7 bln (expected deficit of AUD15.9 bln; last deficit of AUD14.1 bln). Q2 Net Exports Contribution was up 0.1% (expected 0.3%; last -0.1%).
  • New Zealand's Q2 Terms of Trade Index rose 4.1% qtr/qtr (expected 2.1%; last 1.9%).
  • Eurozone's flash August CPI was up 0.2% m/m (last 0.0%), rising 2.1% yr/yr, as expected (last 2.0%). Flash August Core CPI was up 0.3% m/m (last -0.2%), rising 2.3% yr/yr (expected 2.2%; last 2.3%).
  • France's July budget deficit EUR142.0 bln (expected -EUR107.2 bln; last -EUR100.4 bln)
  • Italy's July PPI was up 0.5% m/m (last 1.4%), rising 1.6% yr/yr (last 2.4%).
  • Spain's August Unemployment increased by 21,900 (expected 14,200; last -1,400).
• Today's Data:
  • The August ISM Manufacturing Index checked in at 48.7% for August (Briefing.com consensus: 48.6%), up from 48.0% in July. The dividing line between expansion and contraction is 50.0%, so the August figure suggests manufacturing activity contracted at a slower pace than the prior month.
    • The key takeaway from the report is that the new orders index bounced back into expansion territory following six straight months of contraction; however, the overall activity for the manufacturing sector remains in a disappointing mode of contraction.
  • Total construction spending decreased 0.1% month-over-month in July (Briefing.com consensus: 0.2%) following a 0.4% decline in June. Total private construction was down 0.2% month-over-month, while total public construction was up 0.3% month-over-month. On a year-over-year basis, total construction spending was down 2.8%.
    • The key takeaway from the report is that the softness in July was led by private nonresidential spending, although private residential spending (+0.1%) wasn't exactly strong either.
  • The S&P Global U.S. Manufacturing PMI hit 53.0 in the final reading for August, down from the preliminary reading of 53.3, but up from July's final reading of 49.8.
• Commodities:
  • WTI crude: +2.5% to $65.60/bbl
  • Gold: +2.2% to $3592.20/ozt
  • Copper: +1.1% to $4.64/lb
• Currencies:
  • EUR/USD: -0.7% to 1.1633
  • GBP/USD: -1.2% to 1.3381
  • USD/CNH: +0.1% to 7.1392
  • USD/JPY: +0.9% to 148.45
• The Day Ahead:
  • 7:00 ET: Weekly MBA Mortgage Index (prior -0.5%)
  • 10:00 ET: July Factory Orders (Briefing.com consensus -1.4%; prior -4.8%) and July Job Openings (prior 7.437 mln)
  • 14:00 ET: September Beige Book