Bond Market Update

Geopolitical Concerns Provide Added Support

• U.S. Treasuries climbed on Tuesday with longer tenors recovering their losses from Monday while the short end underperformed. The trading day started with gains across the curve after a night of reduced trading volume in Asia due to holidays in China, Hong Kong, and Singapore. The start of the month brought a batch of final Manufacturing PMI readings for September with Japan (49.7) remaining in contraction while the reading for the eurozone (45.0) improved slightly from the flash estimate (44.8), but also remained well below 50.0, signifying an ongoing contraction. Treasuries extended their opening gains amid morning reports indicating that the White House is concerned about a potential Iranian strike on Israel. The news also gave a boost to crude oil while pressuring equities, though the moves were moderated as the day went on, even though reports of missile strikes crossed the wires a few hours later. Treasuries saw another lurch to highs in reaction to the September ISM Manufacturing report (47.2%; Briefing.com consensus 47.7%), which showed a deepening contraction, but afternoon trade saw a slip toward the day's opening levels. Crude oil advanced but found some resistance near levels from two weeks ago, while the U.S. Dollar Index rose 0.4% to 101.20.
• Yield Check:
  • 2-yr: -3 bps to 3.62%
  • 3-yr: -5 bps to 3.52%
  • 5-yr: -6 bps to 3.52%
  • 10-yr: -6 bps to 3.74%
  • 30-yr: -5 bps to 4.08%

• News:
  • The Atlanta Fed's GDPNow forecast for Q3 GDP was lowered to 2.5% from 3.1% in the previous estimate.
  • French Prime Minister Barnier is expected to call for tax hikes that will raise up to EUR18 bln of revenue.
  • Japan's September Manufacturing PMI hit 49.7 (expected 49.6; last 49.8). August jobs/applications ratio dipped to 1.23 from 1.24 (expected 1.24) and August Unemployment Rate fell to 2.5% from 2.7% (expected 2.6%). Q3 Tankan All Big Industry Capex was up 10.6% (expected 11.9%; last 11.1%).
  • South Korea's September trade surplus reached $6.66 bln (last surplus of $3.77 bln) as imports rose 2.2% yr/yr (last 6.0%) and exports grew 7.5% yr/yr (last 11.2%).
  • India's September Manufacturing PMI hit 56.5 (expected 56.7; last 57.5).
  • Singapore's Q3 URA Property Index was down 1.1% qtr/qtr (last 0.9%).
  • Australia's August Building Approvals fell 6.1% m/m (expected -4.3%; last 11.0%) but were up 7.9% yr/yr (last 25.2%). Private House Approvals were up 0.5% (last 0.9%). August Retail Sales rose 0.7% m/m (expected 0.4%; last 0.1%). September Commodity Prices were down 10.1% yr/yr (last -6.0%).
  • Eurozone's September Manufacturing PMI hit 45.0 (expected 44.8; last 45.8). September CPI was down 0.1% m/m (last 0.1%) but up 1.8% yr/yr, as expected (last 2.2%). September Core CPI was up 0.1% m/m (last 0.3%), rising 2.7% yr/yr, as expected (last 2.8%).
  • Germany's September Manufacturing PMI hit 40.6 (expected 40.3; last 42.4).
  • U.K.'s September Manufacturing PMI hit 51.5, as expected (last 52.5).
  • France's September Manufacturing PMI hit 44.6 (expected 44.0; last 43.9).
  • Italy's September Manufacturing PMI hit 48.3 (expected 49.0; last 49.4).
  • Spain's September Manufacturing PMI hit 53.0 (expected 50.2; last 50.5).
  • Swiss August Retail Sales were up 3.2% yr/yr (expected 2.6%; last 2.9%) and September procer.ch PMI hit 49.9 (expected 47.9; last 49.0).
• Today's Data:
  • The September ISM Manufacturing Index checked in at 47.2% (Briefing.com consensus 47.7%), unchanged from August. The dividing line between expansion and contraction is 50.0%, so the September reading suggests the pace of contraction in the manufacturing sector was the same as the prior month. This was the sixth straight month (and 22nd out of 23) that economic activity in the manufacturing sector contracted.
    • The key takeaway from the report is that it has reinforced the understanding that conditions in the U.S. manufacturing sector are weak, reflected further in the weakening employment index.
  • Total construction spending declined 0.1% month-over-month in August (Briefing.com consensus 0.1%) following a downwardly revised 0.5% decline (from -0.3%) in July. 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 up 4.1%.
    • The key takeaway from the report is that new single-family construction weakened further despite sliding interest rates.
  • The S&P Global U.S. Manufacturing PMI hit 47.3 in the final reading for September, up from 47.0 in the preliminary reading but down from 47.9 in the final reading for August.
  • Job openings increased to 8.040 million in August from a revised 7.711 million (from 7.673 million) in July.
• Commodities:
  • WTI crude: +2.4% to $69.74/bbl
  • Gold: +1.2% to $2689.70/ozt
  • Copper: +0.2% to $4.56/lb
• Currencies:
  • EUR/USD: -0.6% to 1.1071
  • GBP/USD: -0.7% to 1.3281
  • USD/CNH: +0.3% to 7.0276
  • USD/JPY: UNCH at 143.53
• The Day Ahead:
  • 7:00 ET: Weekly MBA Mortgage Index (prior 11.0%)
  • 8:15 ET: September ADP Employment Change (Briefing.com consensus 120,000; prior 99,000)
  • 10:30 ET: Weekly crude oil inventories (prior -4.47 mln)