Bond Market Update

Long Bond Paces Friday Slide

• U.S. Treasuries retreated on Friday, producing losses for the week in 10s and 30s while the front end also faced some pressure today, but the 2-yr note still ended the week with a gain. Longer tenors underperformed from the start after a fairly quiet night in global markets, which featured some overall pressure on sovereign debt and a mixed showing from equities. The first few minutes of the session saw impulse buying after the Retail Sales report for July (-0.6%; Briefing.com consensus 0.2%) missed expectations by a sizable margin, but the brief post-data advance found resistance immediately and was followed by slow but steady selling into the afternoon. Shorter tenors could not avoid a lower finish, but they outperformed throughout the day with the post-data bid briefly pressuring the 2-yr yield to its lowest level since late June. The 2-yr yield settled a couple basis points below its 50-day moving average (4.195%) while the 30-yr yield stopped just shy of its high from July (5.281%), which will be a focal point next week. Crude oil extended this week's gain to $1.34/bbl while the U.S. Dollar Index fell 0.3% to 99.67, shedding 0.1% for the week.
• Yield Check:
  • 2-yr: +3 bps to 4.17% (-4 bps this week)
  • 3-yr: +4 bps to 4.25% (-2 bps this week)
  • 5-yr: +5 bps to 4.36% (UNCH this week)
  • 10-yr: +6 bps to 4.70% (+4 bps this week)
  • 30-yr: +5 bps to 5.27% (+6 bps this week)

• News:
  • The Atlanta Fed's GDPNow forecast for Q3 GDP was lowered to 4.3% from 5.8% in the previous estimate.
  • A former Japanese currency diplomat Furusawa said that the Bank of Japan plans another 50-75 basis points of rate hikes, adding that another U.S. intervention is possible if the yen returns to this year's low against the dollar.
  • Fitch expects to see modest growth in China's insurances sector for the remainder of the year amid some regulatory support.
  • Australia's Prime Minister Albanese said that he appealed to President Trump to exempt Australia from additional tariffs.
  • Reform U.K. leader Farage won a by election in Clacton, which was expected.
  • Russia's Foreign Minister Lavrov said that an immediate ceasefire in Ukraine is not realistic.
  • China's July New Loans were down CNY340.0 bln (expected -CNY50.0 bln; last CNY1.61 trln), July Total Social Financing reached CNY1.41 trln (expected CNY1.20 trln; last CNY3.36 trln).
  • Hong Kong's Q2 GDP contracted 0.6% qtr/qtr, as expected (last -0.6%) but was up 4.3% yr/yr, as expected (last 4.3%).
  • Australia's Q2 Home Loans were down 1.9% qtr/qtr (last -3.5%).
  • New Zealand's July Business PMI hit 54.3 (last 60.1).
  • India's July WPI Inflation was up 9.78% yr/yr (expected 9.95%; last 9.87%).
  • Eurozone's flash Q2 GDP expanded 0.4% qtr/qtr, as expected (last 0.0%), growing 1.0% yr/yr, as expected (last 0.5%). Q2 Employment increased by 0.1% qtr/qtr, as expected (last 0.1%), rising 0.5% yr/yr (expected 0.6%; last 0.5%). June trade surplus reached EUR8.6 bln (expected deficit of EUR2.2 bln; last deficit of EUR9.0 bln).
  • Germany's July WPI was up 0.2% m/m (expected -0.2%; last -0.7%), rising 5.3% yr/yr (last 4.9%).
  • France's July CPI was up 0.6% m/m, as expected (last -0.3%), rising 2.1% yr/yr, as expected (last 1.8%).
  • Swiss Q2 GDP expanded 1.5% qtr/qtr (last 0.7%).
• Today's Data:
  • Total retail sales declined 0.6% month-over-month in July (Briefing.com consensus: 0.2%) following a 0.2% increase in June. Excluding autos, retail sales declined 0.3% month-over-month (Briefing.com consensus: 0.2%) following a 0.2% decline in June.
    • The key takeaway from the report is that control retail sales dropped 0.4% month-over-month. This figure will feed into GDP forecasts, so there is apt to be some downward revisions to Q3 GDP forecasts.
  • The preliminary reading for the University of Michigan Consumer Sentiment Index for August dropped to 51.0 (Briefing.com consensus: 54.5) from the final reading of 55.2 for July. In the same period a year ago, the index stood at 58.2.
    • The key takeaway from the report is that only 8% of all consumers surveyed expect their income growth to exceed inflation in the year ahead. That expectation could ultimately translate into lower discretionary spending activity.
  • Business Inventories were unchanged in June (Briefing.com consensus 0.1%) after increasing a revised 0.4% (from 0.3%) in May.
• Commodities:
  • WTI crude: +1.7% to $82.40/bbl
  • Gold: +0.4% to $4436.90/ozt
  • Copper: UNCH at $6.61/lb
• Currencies:
  • EUR/USD: +0.3% to 1.1565
  • GBP/USD: +0.4% to 1.3533
  • USD/CNH: UNCH at 6.7443
  • USD/JPY: -0.1% to 159.38
• The Week Ahead:
  • Monday: August Empire State Manufacturing Index (Briefing.com consensus 11.0; prior 15.6) at 8:30 ET; August NAHB Housing Market Index (Briefing.com consensus 34; prior 34) at 10:00 ET; and June Net Long-Term TIC Flows (prior $232.7 bln) at 16:00 ET
  • Tuesday: July Housing Starts (Briefing.com consensus 1.360 mln; prior 1.427 mln), Building Permits (Briefing.com consensus 1.390 mln; prior 1.367 mln), July Import Prices (prior 0.3%), Import Prices ex-oil (prior 0.4%), Export Prices (prior -0.6%), and Export Prices ex-agriculture (prior -0.7%) at 8:30 ET; July Industrial Production (Briefing.com consensus 0.3%; prior 0.1%) and Capacity Utilization (Briefing.com consensus 76.3%; prior 76.1%) at 9:15 ET; and July Pending Home Sales (Briefing.com consensus 1.3%; prior -5.4%) at 10:00 ET
  • Wednesday: Weekly MBA Mortgage Index (prior 3.6%) at 7:00 ET; weekly crude oil inventories (prior +17.4 mln) at 10:30 ET; and $ bln 20-yr Treasury bond auction results at 13:00 ET
  • Thursday: Weekly Initial Claims (Briefing.com consensus 206,000; prior 209,000), Continuing Claims (prior 1.777 mln), and August Philadelphia Fed Survey (Briefing.com consensus 25.0; prior 41.4) at 8:30 ET; July Leading Economic Index (Briefing.com consensus -0.1%; prior -0.2%); and weekly natural gas inventories (prior +36 bcf) at 10:30 ET
  • Friday: Flash S&P Global U.S. Manufacturing PMI (prior 53.9) and flash S&P Global U.S. Services PMI (prior 54.6) at 9:45 ET

Sitting on Lows

• U.S. Treasuries trade on their lows after facing continued pressure since their brief opening bounce attempt. Treasuries tried to put together a rally with help from the weak Retail Sales report for July (-0.6%; Briefing.com consensus 0.2%), but the market quickly found resistance after the report was released. The 10-yr note was back in the red just a few minutes after the cash start, followed by continued selling through the morning that has returned the benchmark yield to its closing level from Tuesday. This leaves the 10-yr yield up two basis points for the week while the 2-yr yield is down six basis points from last Friday's settlement thanks to the July CPI and PPI reports that were not as bad as feared. The long bond has underperformed this week with its yield currently up six basis points from last Friday.
• Yield Check:
  • 2-yr: +1 bp to 4.15%
  • 3-yr: +2 bps to 4.23%
  • 5-yr: +3 bps to 4.35%
  • 10-yr: +4 bps to 4.68%
  • 30-yr: +5 bps to 5.27%

Data Recon

• The preliminary reading for the University of Michigan Consumer Sentiment Index for August dropped to 51.0 (Briefing.com consensus: 54.5) from the final reading of 55.2 for July. In the same period a year ago, the index stood at 58.2.
  • The key takeaway from the report is that only 8% of all consumers surveyed expect their income growth to exceed inflation in the year ahead. That expectation could ultimately translate into lower discretionary spending activity.
• Yield Check:
  • 2-yr: -1 bp to 4.13%
  • 3-yr: UNCH at 4.21%
  • 5-yr: +1 bp to 4.33%
  • 10-yr: +2 bps to 4.66%
  • 30-yr: +3 bps to 5.24%

Longer Tenors Maintain Early Weakness

• U.S. Treasuries trade on their lows after slipping from their starting levels. Treasuries started the day near their flat lines with longer tenors showing some relative weakness with the entire complex rising to fresh highs in immediate reaction to the July Retail Sales report (-0.6%; Briefing.com consensus 0.2%), which missed expectations by a wide margin. However, the post-data uptick was followed by an immediate return to pre-data levels, followed by some more selling over the past hour. Equities started the day near their flat lines with the S&P 500 (+0.1%) extending this week's gain to 0.6%.
• Yield Check:
  • 2-yr: -1 bp to 4.13%
  • 3-yr: UNCH at 4.21%
  • 5-yr: +1 bp to 4.32%
  • 10-yr: +2 bps to 4.66%
  • 30-yr: +3 bps to 5.24%

Data Recon

• Total retail sales declined 0.6% month-over-month in July (Briefing.com consensus: 0.2%) following a 0.2% increase in June. Excluding autos, retail sales declined 0.3% month-over-month (Briefing.com consensus: 0.2%) following a 0.2% decline in June.
  • The key takeaway from the report is that control retail sales dropped 0.4% month-over-month. This figure will feed into GDP forecasts, so there is apt to be some downward revisions to Q3 GDP forecasts.
• Yield Check:
  • 2-yr: -1 bp to 4.13%
  • 3-yr: -1 bp to 4.20%
  • 5-yr: UNCH at 4.32%
  • 10-yr: +1 bp to 4.65%
  • 30-yr: +2 bps to 5.23%