Bond Market Update

Long End Retreats Into End of Q2

• U.S. Treasuries finished the second quarter on a lower note with longer tenors pacing a retreat that returned yields to their respective 200-day moving averages. The trading day started with slim losses after a night that was rife with economic data from overseas. Inflation reports remained in focus with Japan's Tokyo CPI accelerating by ten basis points to 2.3% yr/yr in June while flash June CPI readings from France (to 2.1% from 2.3%) and Spain (to 3.4% from 3.6%) showed another deceleration in their yr/yr inflation rates. Besides economic data, the morning brought a reaction to yesterday's first presidential debate between President Biden and former President Trump, with many reports suggesting that the Democratic party might look for a replacement candidate. Treasuries rallied off their opening lows after the Personal Income/Outlays report for May featured the welcome combination of above-consensus income growth (actual 0.5%; Briefing.com consensus 0.4%), below-consensus spending growth (actual 0.2%; Briefing.com consensus 0.3%), and a deceleration in the core PCE price index to 2.6% yr/yr from 2.8%. The bounce briefly lifted action back to yesterday's highs, but renewed pressure in mid-morning trade sent yields on longer tenors to their highest levels of the week while the 2-yr yield finished a bit below this week's high. The second wave of selling followed the release of an upwardly revised University of Michigan Consumer Sentiment survey for June (actual 68.2; Briefing.com consensus 65.6) and news of a Supreme Court decision that will curb the reach of federal agencies. This week's underperformance in longer tenors expanded the 2s10s spread by nine basis points to -38 bps, wider by four basis points when compared to the finish in Q1. Crude oil narrowed its June gain to just under $4.50/bbl but was down just over $1.50/bbl for the quarter. The U.S. Dollar Index spent the day near its unchanged level at 105.90, gaining 1.2% for the month and 1.3% for the quarter.
• Yield Check:
  • 2-yr: UNCH at 4.72% (-1 bp for the week; -17 bps in June; +10 bps in Q2)
  • 3-yr: +1 bp to 4.51% (+5 bps for the week; -19 bps in June; +10 bps in Q2)
  • 5-yr: +3 bps to 4.33% (+6 bps for the week; -20 bps in June; +11 bps in Q2)
  • 10-yr: +6 bps to 4.34% (+8 bps for the week; -17 bps in June; +14 bps in Q2)
  • 30-yr: +8 bps to 4.50% (+10 bps for the week; -15 bps in June; +15 bps in Q2)

• News:
  • The Supreme Court voted 6-3 to overturn a legal doctrine that called on judges to rule in favor of government agencies in instances where the law is ambiguous.
  • The Atlanta Fed's GDPNow forecast for Q2 GDP was lowered to 2.2% from 2.7% in the previous estimate.
  • The first round of French elections will take place this weekend with Marine Le Pen's party expected to receive the largest share of the vote.
  • The latest Consumer Expectations survey for the eurozone showed that year-ahead inflation expectations remained at 2.8% while the three-year outlook dipped to 2.3% from 2.4%.
  • European Commission President von der Leyen was nominated for a second five-year term, as expected.
  • S&P affirmed China's A+ rating with a Stable outlook.
  • Japan's top currency diplomat Kanda will retire at the end of July and will be replaced with a current official from the Ministry of Finance.
  • The Bank of Japan's meeting minutes with a bond market group showed growing expectations for rising rates and insufficient JGB market depth due to reluctance of foreign investors.
  • Japan's June Tokyo CPI was up 2.3% yr/yr (last 2.2%) and Tokyo Core CPI was up 2.1% yr/yr (expected 2.0%; last 1.9%). May Unemployment Rate remained at 2.6%, as expected, and May Industrial Production was up 2.8% m/m (expected 2.0%; last -0.9%). May Housing Starts fell 5.3% yr/yr (expected -6.1%; last 13.9%) and Construction Orders rose 2.1% yr/yr (last 26.4%).
  • South Korea's May Industrial Production was down 1.2% m/m (expected 0.2%; last 2.4%) but up 3.5% yr/yr (expected 3.1%; last 6.2%). May Retail Sales were down 0.2% m/m (last -1.2%) and May Service Sector Output was down 0.5% m/m (last 0.7%).
  • Australia's May Private Sector Credit was up 0.4% m/m, as expected (last 0.5%) and Housing Credit was also up 0.4% m/m (last 0.5%).
  • Germany's May Import Price Index was unchanged m/m (expected 0.2%; last 0.7%), falling 0.4% yr/yr (expected -0.3%; last -1.7%). June Unemployment increased by 19,000 (expected 14,000; last 25,000) and Unemployment Rate rose to 6.0% from 5.9% (expected 5.9%).
  • U.K.'s Q1 GDP expanded 0.7% qtr/qtr (expected 0.6%; last -0.3%), growing 0.3% yr/yr (expected 0.2%; last -0.2%). Q1 Current Account deficit reached GBP21.0 bln (expected deficit of GBP17.7 bln; last deficit of GBP21.2 bln).
  • France's flash June CPI was up 0.1% m/m, as expected (last 0.0%), rising 2.1% yr/yr (last 2.3%). May PPI was down 1.4% m/m (last -3.6%), falling 6.7% yr/yr (last -6.7%). May Consumer Spending was up 1.5% m/m (expected 0.2%; last -0.9%).
  • Italy's flash June CPI was up 0.1% m/m (expected 0.2%; last 0.2%), rising 0.8% yr/yr (expected 1.0%; last 0.8%). April Industrial Sales rose 0.8% m/m (last -2.8%) but were down 2.0% yr/yr (last -5.1%). May non-EU trade surplus reached EUR5.77 bln (last surplus of EUR4.91 bln).
  • Spain's flash June CPI was up 0.3% m/m (expected 0.2%; last 0.3%), rising 3.4% yr/yr, as expected (last 3.6%). June Core CPI was up 3.0% yr/yr (last 3.0%). April Current Account surplus reached EUR2.83 bln (last EUR3.29 bln).
  • Swiss June KOF Leading Indicators rose to 102.7 from 102.2 (expected 101.0).
• Today's Data:
  • Personal income increased 0.5% month-over-month in May (Briefing.com consensus 0.4%) following a 0.3% increase in April and personal spending increased 0.2% month-over-month (Briefing.com consensus 0.3%) following a downwardly revised 0.1% increase (from 0.2%) in April. The PCE Price Index was unchanged on the heels of a 0.3% increase in April, leaving it up 2.6% year-over-year versus 2.7% in April. The core-PCE Price Index, which excludes food and energy, was up 0.1% month-over-month after a 0.3% increase in April, leaving it up 2.6% year-over-year versus 2.8% in April.
    • The key takeaway from the report is that it was right on the mark with numbers supporting a soft landing and moderating inflation, which will keep alive the market's hope for a Fed rate cut before the November election.
  • The final Index of Consumer Sentiment for June checked in at 68.2 (Briefing.com consensus 65.6) versus the preliminary reading of 65.6. The final reading for May was 69.1. In the same period a year ago, the index stood at 64.2.
    • The key takeaway from the report is that consumers were generally feeling better about short- and long-run business conditions due to expectations of softening interest rates.
  • The Chicago PMI hit 47.4 in June, up from 35.4 in May.
• Commodities:
  • WTI crude: -0.2% to $81.53/bbl
  • Gold: +0.1% to $2339.30/ozt
  • Copper: +0.9% to $4.39/lb
• Currencies:
  • EUR/USD: +0.1% to 1.0712
  • GBP/USD: UNCH at 1.2637
  • USD/CNH: UNCH at 7.2989
  • USD/JPY: +0.1% to 160.80
• The Week Ahead:
  • Monday: Final June S&P Global U.S. Manufacturing PMI (prior 51.7) at 9:45 ET; June ISM Manufacturing Index (prior 48.7%) and May Construction Spending (prior -0.1%) at 10:00 ET
  • Tuesday: May job openings (prior 8.059 mln) at 10:00 ET
  • Wednesday: Weekly MBA Mortgage Index (prior 0.8%) at 7:00 ET; June ADP Employment Change (prior 152,000) at 8:15 ET; weekly Initial Claims (prior 233,000), Continuing Claims (prior 1.839 mln), and May Trade Balance (prior -$74.6 bln) at 8:30 ET; S&P Global U.S. Services PMI (prior 55.1) at 9:45 ET; June ISM Non-Manufacturing Index (prior 53.8%) and May Factory Orders (prior 0.7%) at 10:00 ET; weekly crude oil inventories (prior +3.59 mln) at 10:30 ET; weekly natural gas inventories (prior +52 bcf) at 12:00 ET; and June FOMC Minute at 14:00 ET; **Equity market to close at 13:00 ET; Treasury market to close at 14:00 ET**
  • Thursday: Bond and equity markets closed for Independence Day
  • Friday: June Nonfarm Payrolls (prior 272,000), Nonfarm Private Payrolls (prior 229,000), Average Hourly Earnings (prior 0.4%), Unemployment Rate (prior 4.0%), and Average Workweek (prior 34.3) at 8:30 ET