Bond Market Update

Data Recon

• The ISM Services PMI decreased to 54.0% in June (Briefing.com consensus: 54.2%) from 54.5% in May. The dividing line between expansion and contraction is 50.0%, so the June reading reflects services sector activity growing just a tad slower than the prior month.
  • The key takeaway from the report is that activity in the services sector is still running at a good pace despite ongoing price pressures. The June reading was 0.9 percentage points above the 12-month average of 53.1%.
• Yield Check:
  • 2-yr: -2 bps to 4.12%
  • 3-yr: -2 bps to 4.15%
  • 5-yr: -1 bp to 4.22%
  • 10-yr: UNCH at 4.48%
  • 30-yr: +1 bp to 5.00%

Short End Ahead

• U.S. Treasuries are on track for a higher start that should reverse a good chunk of last week's loss in the 2-yr note. Treasury futures spent the overnight session in a steady ascent with the front end leading the way while the long end is a bit behind with the 30-yr bond up slightly. The overnight advance in Treasury futures has coincided with modest gains in most other sovereign debt while Japanese debt faced some pressure ahead of tomorrow's 30-yr JGB auction. Investors received a few economic reports since Friday afternoon with most coming in ahead of expectations. Economic data during the U.S. session will be limited to the 9:45 ET release of the final S&P Global U.S. Services PMI (prior 51.3) for June, followed by the June ISM Non-Manufacturing Index (Briefing.com consensus 54.2%; prior 54.5%) at 10:00 ET. Crude oil hovers below $69/bbl while the U.S. Dollar Index is up 0.2% at 101.09.
• Yield Check:
  • 2-yr: -3 bps to 4.11%
  • 3-yr: -4 bps to 4.13%
  • 5-yr: -3 bps to 4.20%
  • 10-yr: -3 bps to 4.46%
  • 30-yr: -1 bp to 4.98%

• News:
  • South Korea launched 24-hour currency trading and South Korea's President Lee said that a committee to enhance chip competitiveness will begin operating in August.
  • China has begun cracking down on safety violations in mining and chemical production.
  • European Central Bank policymaker Moulin said that he is comfortable with the base scenario and that the balance of risks is in the right place.
  • Germany increased its borrowing estimate for 2027 by about EUR7 bln due to weak tax revenue.
  • Hong Kong's June Manufacturing PMI hit 52.0 (last 50.4).
  • Australia's June MI Inflation Gauge was down 0.4% m/m (last -0.3%). June ANZ Commodity Price Index was down 1.0% m/m (last 0.7%) and June ANZ Job Advertisements decreased 0.2% m/m (last 2.0%).
  • Singapore's May Retail Sales were down 2.3% m/m (last 0.4%) but up 3.0% yr/yr (last 5.4%).
  • Eurozone's May Retail Sales were up 0.2% m/m, as expected (last -0.3%), rising 1.6% yr/yr (expected 1.5%; last 0.9%). May PPI was up 0.2% m/m, as expected (last 0.7%), rising 5.9% yr/yr (expected 5.7%; last 5.0%). July Sentix Investor Confidence rose to -3.1 from -13.4 (expected -14.5; last -13.4).
  • Germany's May Factory Orders were up 1.9% m/m (expected 1.1%; last -3.2%).
  • U.K.'s June Construction PMI hit 38.4 (expected 40.1; last 38.2).
  • Swiss June Unemployment Rate rose to 3.1% from 3.0% (expected 3.0%).
• Commodities:
  • WTI Crude: -0.4% to $68.43/bbl
  • Gold: +1.0% to $4167.60/ozt
  • Copper: +1.1% to $6.238/lb
• Currencies:
  • EUR/USD: -0.2% to 1.1413
  • GBP/USD: UNCH at 1.3342
  • USD/CNH: +0.3% to 6.7983
  • USD/JPY: +0.6% to 162.33
• Data out Today:
  • 9:45 ET: Final June S&P Global U.S. Services PMI (prior 51.3)
  • 10:00 ET: June ISM Non-Manufacturing Index (Briefing.com consensus 54.2%; prior 54.5%)

Treasuries Drift Into Long Weekend

• U.S. Treasuries finished the holiday-shortened week on a mixed, but generally flat note, locking in losses for the week. Intraday action was confined to a narrow range even though the market received the monthly Employment Situation report, which usually invites increased attention. The June report was disappointing as nonfarm payroll growth (57,000; Briefing.com consensus 110,000) undershot expectations and there were sizable downward revisions to readings from May (to 129,000 from 172,000) and April (to 148,000 from 179,000). The Unemployment Rate unexpectedly dipped to 4.2% from 4.3%, but the labor force participation rate also decreased. The report prompted a quick rebound off starting lows, but 10s and 30s found resistance that kept them out of the green while the front end held onto its slim gains into the afternoon. Shorter tenors outperformed this week, even though the entire complex retreated, which widened the 2s10s spread by seven basis points to 35 bps. Crude oil ended the day and the week little changed just south of $70/bbl while the U.S. Dollar Index fell 0.5% for the day and the week to 100.87. Bond and equity markets will be closed tomorrow, returning for a full session on Monday. Happy Independence Day!
• Yield Check:
  • 2-yr: -2 bps to 4.14% (+5 bps this week)
  • 3-yr: -1 bp to 4.17% (+8 bps this week)
  • 5-yr: UNCH at 4.23% (+10 bps this week)
  • 10-yr: +1 bp to 4.49% (+12 bps this week)
  • 30-yr: +1 bp to 4.99% (+13 bps this week)

• News:
  • Japanese officials are reportedly considering a shift away from hinting at interventions before they take place.
  • Japan's Prime Minister Takaichi is visiting India, looking to form some reciprocal agreements on investment.
  • Japan's final tax revenue for the last fiscal year is expected to reach a six-year high.
  • Germany's Chancellor Merz said that a pension overhaul will be completed by the end of the year, adding that income tax cuts amounting to about EUR10 bln are in the cards.
  • Japan's June Monetary Base was down 13.7% yr/yr (expected -10.0%; last -12.2%).
  • South Korea's June CPI was up 0.1% m/m, as expected (last 0.5%), rising 3.2% yr/yr, as expected (last 3.1%).
  • Hong Kong's May Retail Sales rose 7.9% yr/yr (last 8.6%).
  • Australia's May trade deficit reached AUD3.018 bln (expected surplus of AUD2.190 bln; last surplus of AUD1.383 bln) as imports grew 2.6% m/m (last 0.2%) and exports fell 6.9% m/m (last 7.2%).
  • New Zealand's May Building Consents were down 4.0% m/m (last 11.1%).
  • Eurozone's May Unemployment Rate remained at 6.2% (expected 6.3%).
  • France's May government budget deficit reached EUR93.3 bln (last deficit of EUR69.6 bln).
  • Italy's May Unemployment Rate fell to 5.0% from 5.1% (expected 5.1%).
  • Spain's June Unemployment decreased by 28,700 (expected -40,800; last -36,300).
  • Swiss June CPI was unchanged m/m (expected 0.1%; last 0.2%), rising 0.5% yr/yr, as expected (last 0.6%).
• Today's Data:
  • June nonfarm payrolls increased by 57,000 (Briefing.com consensus: 110,000). The 3-month average for total nonfarm payrolls decreased to 111,000 from 164,000. May nonfarm payrolls revised to 129,000 from 172,000. April nonfarm payrolls revised to 148,000 from 179,000.
    • June private sector payrolls increased by 49,000 (Briefing.com consensus: 88,000). May private sector payrolls revised to 97,000 from 120,000. April private sector payrolls revised to 150,000 from 177,000.
    • June unemployment rate was 4.2% (Briefing.com consensus: 4.3%) versus 4.3% in May. Persons unemployed for 27 weeks or more accounted for 27.3% of the unemployed versus 27.5% in May. The U6 unemployment rate, which accounts for unemployed and underemployed workers, decreased to 7.9% from 8.1% in May.
    • June average hourly earnings were up 0.3% (Briefing.com consensus: 0.3%) on the heels of a 0.3% increase in May. Over the last 12 months, average hourly earnings have risen 3.5% versus 3.4% for the 12 months ending in May.
    • The average workweek in June was 34.3 hours (Briefing.com consensus: 34.3) versus 34.3 hours in May. The manufacturing workweek was edged down to 40.3 hours. Factory overtime edged up to 3.2 hours.
    • The labor force participation rate decreased to 61.5% from 61.8% in May and the employment-population ratio decreased to 59.0% from 59.2% in May.
  • Initial jobless claims for the week ending June 27 declined by 1,000 to 215,000 (Briefing.com consensus: 220,000). Continuing jobless claims for the week ending June 20 increased by 2,000 to 1.814 million.
    • The key takeaway from the report is that the low level of initial jobless claims continues to reinforce the understanding that layoff activity remains quite low overall.
  • Factory orders declined 1.3% month-over-month in May (Briefing.com consensus: 1.5%) following an upwardly revised 5.3% increase (from 4.8%) in April. Excluding transportation, factory orders increased 1.9% on the heels of a 1.7% increase in April. Shipments of manufactured goods jumped 1.6% after increasing 1.3% in April.
    • The key takeaway from the report is that the headline weakness was a function of a large decline in volatile transportation equipment orders. Exclude that factor, and factory orders were quite solid in May.
  • Weekly natural gas inventories increased by 87 bcf after increasing by 76 bcf a week ago.
• Commodities:
  • WTI crude: UNCH at $68.68/bbl 
  • Gold: +1.1% to $4125.90/ozt
  • Copper: -0.2% to $6.17/lb
• Currencies:
  • EUR/USD: +0.5% to 1.1434
  • GBP/USD: +0.6% to 1.3348
  • USD/CNH: -0.1% to 6.7877
  • USD/JPY: -0.9% to 161.06
• The Week Ahead:
  • Monday: Final June S&P Global U.S. Services PMI (prior 51.3) at 9:45 ET and June ISM Non-Manufacturing Index (Briefing.com consensus 54.2%; prior 54.5%) at 10:00 ET
  • Tuesday: May Trade Balance (Briefing.com consensus -$78.8 bln; prior -$55.9 bln) at 8:30 ET and 3-yr Treasury note auction results at 13:00 ET
  • Wednesday: Weekly MBA Mortgage Index (prior 0.0%) at 7:00 ET; May Wholesale Inventories (Briefing.com consensus 0.3%; prior 0.6%) at 10:00 ET; weekly crude oil inventories (prior -3.78 mln) at 10:30 ET; 10-yr Treasury note reopening results at 13:00 ET; June FOMC Minutes at 14:00 ET; and May Consumer Credit (Briefing.com consensus $18.9 bln; prior $20.7 bln) at 15:00 ET
  • Thursday: Weekly Initial Claims (Briefing.com consensus 220,000; prior 215,000) and Continuing Claims (prior 1.814 mln) at 8:30 ET; June Existing Home Sales (Briefing.com consensus 4.20 mln; prior 4.17 mln) at 10:00 ET; weekly natural gas inventories (prior +87 bcf) at 10:30 ET; and 30-yr Treasury bond reopening results at 13:00 ET
  • Friday: Nothing of note

Highs Revisited

• Recent action saw the 5-yr note and shorter tenors drift back toward their post-NFP highs while 10s and 30s have inched to fresh highs, though the long bond is still slightly negative for the day with the early close looming at 14:00 ET. Today's underperformance in longer tenors has been consistent with what has been seen through this abbreviated week. The 10-yr yield is currently up ten basis points since last Friday's settlement while the 2-yr yield is up just three basis points for the week. Equity indices have faced some recent pressure amid ongoing weakness in many tech stocks, leaving the S&P 500 (-0.2%) with a modest loss.
• Yield Check:
  • 2-yr: -4 bps to 4.12%
  • 3-yr: -3 bps to 4.15%
  • 5-yr: -2 bps to 4.21%
  • 10-yr: -1 bp to 4.47%
  • 30-yr: UNCH at 4.97%

Short End Ahead

• U.S. Treasuries trade in mixed fashion with gains up front and a slight loss in the long bond. Treasuries began the day in the red, but the entire complex rallied to highs in immediate reaction to the release of the Employment Situation report for June (57,000; Briefing.com consensus 110,000), which showed underwhelming payroll growth, though the unemployment rate unexpectedly dipped to 4.2% from 4.3%. The post-data rally was followed by some light backtracking over the past 90 minutes, though the pace of the action has been slowing in recent trade. Keep in mind that the Treasury market will close at 14:00 ET today.
• Yield Check:
  • 2-yr: -3 bps to 4.13%
  • 3-yr: -2 bps to 4.16%
  • 5-yr: -1 bp to 4.23%
  • 10-yr: +1 bp to 4.48%
  • 30-yr: +1 bp to 4.98%