Bond Market Update

Bounce Meets Resistance

• U.S. Treasuries retreated on Thursday, pulling back from three days of steady gains. The Thursday pullback started in the overnight futures market alongside other sovereign debt while global tech stocks faced continued turbulence. Additional pressure built at the open after FT reported that Fed Chairman Warsh is open to a rate hike at the upcoming FOMC meeting if inflation does not cool. The long bond staged an early bounce but eventually gave in to the steady pressure that other tenors felt since the start. News of Alphabet's (GOOG) planned $25 bln multi-tranche offering and a rally in the price of oil kept the market under pressure into the afternoon, returning the 2-yr yield to its closing level from Monday ahead of tomorrow's release of July Nonfarm Payrolls (Briefing.com consensus 86,000; prior 57,000) at 8:30 ET. The report will factor into the market's rate hike bets even as Fed Chairman Warsh is trying to wean markets off relying on rate and policy expectations. Crude oil finished back above its 200-day moving average (76.26) while the U.S. Dollar Index rose 0.3% to 99.94.
• Yield Check:
  • 2-yr: +7 bps to 4.25%
  • 3-yr: +6 bps to 4.30%
  • 5-yr: +7 bps to 4.39%
  • 10-yr: +5 bps to 4.67%
  • 30-yr: +4 bps to 5.21%

• News:
  • Iran's state media reported that a draft version of the U.S.-Iran deal, which will be voted on in the Iranian parliament, calls for a ban on U.S.- and Israel-linked vessels in the Strait of Hormuz.
  • Fitch opined that the Bank of Japan will have to continue hiking rates for the yen to continue climbing off multi-decade low against the dollar.
  • South Korea's June Current Account surplus reached $49.73 bln (last surplus of $38.61 bln).
  • Australia's June Building Approvals were up 7.2% m/m, as expected (last -1.6%), rising 8.9% yr/yr, as expected (last 5.5%). June trade surplus reached AUD1.929 bln (expected deficit of AUD1.060 bln; last deficit of AUD2.367 bln) as imports fell 0.2% m/m (last 0.9%) and exports rose 9.6% m/m (last -7.6%).
  • Eurozone's June Retail Sales were down 0.3% m/m (expected 0.1%; last 0.4%) but up 0.7% yr/yr (expected 1.0%; last 1.9%).
  • Germany's June Factory Orders rose 3.1% m/m (expected 0.5%; last 0.3%).
  • France's final Q2 nonfarm payrolls were down 0.1% qtr/qtr, as expected (last -0.1%).
  • Italy's June Industrial Production was down 1.0% m/m (expected 0.3%; last -0.3%), falling 0.6% yr/yr (expected 1.0%; last 1.2%).
  • Spain's June Industrial Production was up 1.1% yr/yr (last 3.1%).
  • Swiss July Unemployment Rate remained at 3.1%, as expected.
• Today's Data:
  • Nonfarm business sector labor productivity increased 1.4% in the second quarter (Briefing.com consensus: 0.8%) following an upwardly revised 0.8% increase (from 0.3%) in the first quarter. Unit labor costs were up 1.3% (Briefing.com consensus: 1.7%) following a downwardly revised 1.3% increase (from 1.8%) in the first quarter.
    • The key takeaway from the report is that rising productivity helped keep labor costs in check.
  • Initial jobless claims for the week ending August 1 increased by 1,000 to 199,000 (Briefing.com consensus: 200,000). Continuing jobless claims for the week ending July 25 increase by 24,000 to 1.801 million.
    • The key takeaway from the report, once again, is the extraordinarily low level of initial jobless claims, which reflects an environment in which employers are still reluctant to cut staff. That will be read as a good sign for economic demand.
  • Wholesale Inventories increased by 0.2% month-over-month in June (Briefing.com consensus 0.3%) after increasing 0.3% in May.
  • Weekly natural gas inventories increased by 33 bcf after increasing by 28 bcf a week ago.
• Commodities:
  • WTI crude: +2.8% to $77.27/bbl
  • Gold: -0.1% to $4300.50/ozt
  • Copper: -0.3% to $6.71/lb
• Currencies:
  • EUR/USD: -0.3% to 1.1524
  • GBP/USD: -0.1% to 1.3458
  • USD/CNH: UNCH at 6.7480
  • USD/JPY: +0.4% to 158.33
• The Day Ahead:
  • 8:30 ET: July Nonfarm Payrolls (Briefing.com consensus 86,000; prior 57,000), Nonfarm Private Payrolls (Briefing.com consensus 69,000; prior 49,000), Unemployment Rate (Briefing.com consensus 4.2%; 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)
  • 15:00 ET: June Consumer Credit (Briefing.com consensus $9.0 bln; prior -$0.2 bln)

Losses Widened

• U.S. Treasuries trade on their lows with longer tenors pacing an intraday extension of today's starting losses. The long bond showed some early resilience, briefly rising above its starting mark, but it eventually gave in to the overall pressure that has driven the complex to fresh lows. Today's pullback from three days of buying has received added intraday support from a rising price of oil after it was reported that a draft version of the U.S.-Iran deal, which will be voted on in the Iranian parliament, calls for a ban on U.S.- and Israel-linked vessels in the Strait of Hormuz. Crude oil has risen back above its 200-day moving average (76.26), currently up $2.83, or 3.8%, for the day.
• Yield Check:
  • 2-yr: +6 bps to 4.24%
  • 3-yr: +6 bps to 4.30%
  • 5-yr: +7 bps to 4.39%
  • 10-yr: +6 bps to 4.67%
  • 30-yr: +4 bps to 5.21%

Front End Behind

• U.S. Treasuries trade in the red, though the first 90 minutes of action have seen some divergence with resilience in the long bond lifting it to a session high while the front end remains pinned to lows after a morning report from FT that Fed Chairman Warsh is open to a rate hike if there is no improvement in the inflation picture. Today's release of the report on preliminary productivity (1.4%; Briefing.com consensus 0.8%) and unit labor costs (1.3%; Briefing.com consensus 1.7%) for Q2 showed productivity growth outpacing cost growth at a slight margin, so it had little impact on the overall picture. Inflation will again be the focus on Wednesday when the market receives July CPI (prior -0.4%) and Core CPI (prior 0.0%), followed by PPI (-0.3%) and Core PPI (0.2%) on Thursday. Besides the FT report, the market learned from Bloomberg this morning that Alphabet (GOOG) is seeking to raise $25 bln as part of a ten-tranche debt sale. The news has likely contributed to the early pressure on the front end since it signals incoming investment grade supply into the bond market.
• Yield Check:
  • 2-yr: +4 bps to 4.22%
  • 3-yr: +3 bps to 4.27%
  • 5-yr: +4 bps to 4.36%
  • 10-yr: +3 bps to 4.64%
  • 30-yr: +1 bp to 5.19%

Data Recon

• Nonfarm business sector labor productivity increased 1.4% in the second quarter (Briefing.com consensus: 0.8%) following an upwardly revised 0.8% increase (from 0.3%) in the first quarter. Unit labor costs were up 1.3% (Briefing.com consensus: 1.7%) following a downwardly revised 1.3% increase (from 1.8%) in the first quarter.
  • The key takeaway from the report is that rising productivity helped keep labor costs in check.
• Initial jobless claims for the week ending August 1 increased by 1,000 to 199,000 (Briefing.com consensus: 200,000). Continuing jobless claims for the week ending July 25 increase by 24,000 to 1.801 million.
  • The key takeaway from the report, once again, is the extraordinarily low level of initial jobless claims, which reflects an environment in which employers are still reluctant to cut staff. That will be read as a good sign for economic demand.
• Yield Check:
  • 2-yr: +3 bps to 4.21%
  • 3-yr: +3 bps to 4.27%
  • 5-yr: +3 bps to 4.35%
  • 10-yr: +2 bps to 4.64%
  • 30-yr: +2 bps to 5.19%

 Pullback Taking Shape

• U.S. Treasuries are on track for a modestly lower start after three days of gains that pressured yields on longer tenors from their highest levels of the year. Treasury futures spent the early portion of the night in a sideways range, slipping to lows once the focus turned to action in Europe, where equity markets are on the rise while sovereign debt is facing some mild pressure alongside U.S. Treasuries. JGBs bucked the trend overnight, climbing thanks to help from a good 30-yr JGB auction and comments from Finance Minister Katayama that new debt issuance will not be used to make up for tax revenue shortfalls. The overnight data flow was on the light side, but the U.S. session will feature the release of the preliminary Q2 report on Productivity (Briefing.com consensus 0.8%; prior 0.3%) and Unit Labor Costs (Briefing.com consensus 1.7%; prior 1.8%), which carries inflationary implications. Staying on the subject of inflation, FT reported this morning that Fed Chairman Warsh is open to a rate hike in September if high inflation persists. Crude oil hovers just above $75/bbl while the U.S. Dollar Index is up 0.1% at 99.75.
• Yield Check:
  • 2-yr: +3 bps to 4.21%
  • 3-yr: +3 bps to 4.27%
  • 5-yr: +4 bps to 4.36%
  • 10-yr: +3 bps to 4.65%
  • 30-yr: +3 bps to 5.20%

• News:
  • Fitch opined that the Bank of Japan will have to continue hiking rates for the yen to continue climbing off multi-decade low against the dollar.
  • South Korea's June Current Account surplus reached $49.73 bln (last surplus of $38.61 bln).
  • Australia's June Building Approvals were up 7.2% m/m, as expected (last -1.6%), rising 8.9% yr/yr, as expected (last 5.5%). June trade surplus reached AUD1.929 bln (expected deficit of AUD1.060 bln; last deficit of AUD2.367 bln) as imports fell 0.2% m/m (last 0.9%) and exports rose 9.6% m/m (last -7.6%).
  • Eurozone's June Retail Sales were down 0.3% m/m (expected 0.1%; last 0.4%) but up 0.7% yr/yr (expected 1.0%; last 1.9%).
  • Germany's June Factory Orders rose 3.1% m/m (expected 0.5%; last 0.3%).
  • France's final Q2 nonfarm payrolls were down 0.1% qtr/qtr, as expected (last -0.1%).
  • Italy's June Industrial Production was down 1.0% m/m (expected 0.3%; last -0.3%), falling 0.6% yr/yr (expected 1.0%; last 1.2%).
  • Spain's June Industrial Production was up 1.1% yr/yr (last 3.1%).
  • Swiss July Unemployment Rate remained at 3.1%, as expected.
• Commodities: 
  • WTI Crude: +0.8% to $75.80/bbl
  • Gold: +0.3% to $4319.60/ozt
  • Copper: +0.9% to $6.786/lb
• Currencies:
  • EUR/USD: -0.1% to 1.1541
  • GBP/USD: UNCH at 1.3463
  • USD/CNH: UNCH at 6.7489
  • USD/JPY: +0.1% to 157.88
• Data out Today:
  • 8:30 ET: Preliminary Q2 Productivity (Briefing.com consensus 0.8%; prior 0.3%) and preliminary Q2 Unit Labor Costs (Briefing.com consensus 1.7%; prior 1.8%), weekly Initial Claims (Briefing.com consensus 200,000; prior 197,000), and Continuing Claims (prior 1.782 mln)
  • 10:00 ET: June Wholesale Inventories (Briefing.com consensus 0.3%; prior 0.3%)
  • 10:30 ET: Weekly natural gas inventories (prior +28 bcf)