Bond Market Update

Strong Jobs Report Reins in Rate Cut Hopes

• U.S. Treasuries finished a down week on a sharply lower note in response to a much stronger than expected Employment Situation report for September, which showed above-consensus nonfarm payroll growth (254,000; Briefing.com consensus 165,000), a larger-than-expected increase in average hourly earnings (0.4%; Briefing.com consensus 0.3%), and an unexpected dip in the Unemployment Rate (4.1%; Briefing.com consensus 4.2%). Treasuries started the day with modest losses that were extended in immediate reaction to the jobs report. The post-data pressure sent the 2-yr yield to its highest level in a month while yields on 10s and 30s vaulted to their highest levels in nearly two months. There was no significant bounce attempt as the 2-yr note fell to a fresh low in the late morning, remaining pressured into the close while the long bond finished a touch above its morning low. Today's strong data, which overshadowed news about a suspension of the dockworker strike, exerted additional pressure on rate cut expectations with the implied likelihood of a 50-bps cut on November 7 falling to zero from 32.1% yesterday and 53.3% a week ago. This week's underperformance in shorter tenors tightened the 2s10s spread by 14 bps to five basis points. Crude oil extended this week's gain to $6.25, or 9.2%, amid ongoing geopolitical worries, even as the U.S. Dollar Index climbed 0.5% to 102.53 today, jumping 2.1% for the week. This was the best weekly performance for the Index in more than two years.
• Yield Check:
  • 2-yr: +22 bps to 3.93% (+37 bps this week)
  • 3-yr: +21 bps to 3.84% (+36 bps this week)
  • 5-yr: +18 bps to 3.81% (+31 bps this week)
  • 10-yr: +13 bps to 3.98% (+23 bps this week)
  • 30-yr: +9 bps to 4.27% (+17 bps this week)

• News:
  • Dockworkers suspended their strike until mid-January after receiving a favorable contract offer.
  • Italy's Finance Minister Giorgetti said that the government is planning a windfall levy on corporations to reduce the budget deficit and that a 1.0% growth target for this year is realistic.
  • HSBC expects a big fiscal stimulus announcement from Chinese officials early next week.
  • Former Bank of Japan policymaker Masaka said that the central bank will continue looking for the right time for the next rate hike.
  • India's September Services PMI hit 57.7 (expected 58.9; last 60.9).
  • Singapore's August Retail Sales rose 0.7% m/m (last 3.1%), increasing 0.6% yr/yr (last 1.0%).
  • Hong Kong's September Manufacturing PMI hit 50.0 (last 49.4).
  • Australia's August Home Loans were up 0.7% m/m (last 2.5%) and August Invest Housing Finance was up 1.4% m/m (last 5.1%).
  • U.K.'s Q2 Housing Equity Withdrawal was down GBP14.7 bln (expected -GBP20.3 bln; last -GBP23.0 bln).
  • France's August Industrial Production was up 1.4% m/m (expected 0.3%; last 0.2%).
  • Italy's August Retail Sales were down 0.5% m/m (expected 0.2%; last 0.5%) but up 0.8% yr/yr (last 0.9%). Q2 Public Deficit decreased to 3.4% from 8.4%.
  • Spain's August Industrial Production was down 0.1% m/m (expected 0.1%; last -0.4%).
  • Swiss September Unemployment Rate rose to 2.6% from 2.5%, as expected.
• Today's Data:
  • September nonfarm payrolls increased by 254,000 (Briefing.com consensus 165,000). The 3-month average for total nonfarm payrolls increased to 186,000 from 140,000. August nonfarm payrolls revised to 159,000 from 142,000. July nonfarm payrolls revised to 144,000 from 89,000. o September private sector payrolls increased by 223,000 (Briefing.com consensus 125,000). August private sector payrolls revised to 114,000 from 118,000. July private sector payrolls revised to 99,000 from 74,000.
    • September unemployment rate was 4.1% (Briefing.com consensus 4.2%), versus 4.2% in August. Persons unemployed for 27 weeks or more accounted for 23.7% of the unemployed versus 21.3% in August. The U6 unemployment rate, which accounts for unemployed and underemployed workers, decreased to 7.7% from 7.9%.
    • September average hourly earnings were up 0.4% (Briefing.com consensus 0.3%) versus an upwardly revised 0.5% increase (from 0.4%) in August. Over the last 12 months, average hourly earnings have risen 4.0%, versus 3.9% for the 12 months ending in August.
    • The average workweek in September was 34.2 hours (Briefing.com consensus 34.3), versus 34.3 hours in August. Manufacturing workweek was unchanged at 40.0 hours. Factory overtime decreased 0.1 hour to 2.9 hours.
    • The labor force participation rate held steady at 62.7% and the employment-population ratio increased to 60.2% from 60.0%.
• Commodities:
  • WTI crude: +0.9% to $74.40/bbl
  • Gold: -0.5% to $2667.90/ozt
  • Copper: +0.4% to $4.57/lb
• Currencies:
  • EUR/USD: -0.5% to 1.0973 
  • GBP/USD: UNCH at 1.3121
  • USD/CNH: +0.7% to 7.0988
  • USD/JPY: +1.4% to 148.81
• The Week Ahead:
  • Monday: August Consumer Credit (Briefing.com consensus $12.7 bln; prior $25.5 bln) at 15:00 ET
  • Tuesday: September NFIB Small Business Optimism (prior 91.2) at 6:00 ET; August Trade Balance (Briefing.com consensus -$71.3 bln; prior -$78.8 bln) at 8:30 ET; and $58 bln 3-yr Treasury note auction results at 13:00 ET
  • Wednesday: Weekly MBA Mortgage Index (prior -1.3%) at 7:00 ET; August Wholesale Inventories (Briefing.com consensus 0.2%; prior 0.2%) at 10:00 ET; weekly crude oil inventories (prior +3.89 mln) at 10:30 ET; $39 bln 10-yr Treasury note reopening results at 13:00 ET; and September FOMC Minutes at 14:00 ET
  • Thursday: September CPI (Briefing.com consensus 0.1%; prior 0.2%), Core CPI (Briefing.com consensus 0.2%; prior 0.3%), weekly Initial Claims (Briefing.com consensus 229,000; prior 225,000), and Continuing Claims (prior 1.826 mln) at 8:30 ET; weekly natural gas inventories (prior +55 bcf) at 10:30 ET; $22 bln 30-yr Treasury bond auction results at 13:00 ET; and September Treasury Budget (prior -$380.1 bln) at 14:00 ET
  • Friday: September PPI (Briefing.com consensus 0.1%; prior 0.2%) and Core PPI (Briefing.com consensus 0.2%; prior 0.3%) at 8:30 ET; and preliminary October University of Michigan Consumer Sentiment (Briefing.com consensus 70.1; prior 70.1) at 10:00 ET