Bond Market Update

Sharp Slide to Start July

• U.S. Treasuries began July with sharp losses across the curve, sending yields on 10s and 30s to one-month highs while the 2-yr yield reached a two-week high. The trading day started on a firmly lower note after a night that featured the release of final Manufacturing PMI readings for June. Japan's manufacturing sector saw no growth while China reported contraction in the official reading (49.5) and modest expansion in the Caixin Manufacturing PMI (51.8). Meanwhile, the eurozone's Manufacturing PMI (45.8; expected 45.6) was a bit ahead of expectations, but still showed contracting activity. The opening retreat lifted yields on all tenors past their respective 200-day moving averages while additional intraday pressure sent yields on 10s and 30s past their 50-day moving averages as well. The market staged a brief bounce after the release of a below-consensus ISM Manufacturing Index for June (48.5%; Briefing.com consensus 49.1%), but pressure returned in short order, keeping the market on the defensive into the afternoon. Today's retreat took place alongside an extension of crude oil's June rally off a four-month low, as WTI crude climbed more than $1.50 to a two-month high, extending its gain from its June low to more than $10/bbl. The U.S. Dollar ended the day little changed at 105.88 after recovering from overnight weakness.
• Yield Check:
  • 2-yr: +5 bps to 4.77%
  • 3-yr: +8 bps to 4.59%
  • 5-yr: +11 bps to 4.44%
  • 10-yr: +14 bps to 4.48%
  • 30-yr: +14 bps to 4.64%

• News:
  • The Atlanta Fed's GDPNow forecast for Q2 GDP was lowered to 1.7% from 2.2% in the previous estimate.
  • Cleveland Fed President Mester's term ends today, and she will be replaced by Beth Hammack on August 31.
  • Continued demand for Chinese debt briefly drove the country's 10-yr yield to a fresh record low of 2.19%.
  • China's June Manufacturing PMI hit 49.5, as expected (last 49.5) and Non-Manufacturing PMI hit 50.5 (expected 51.1; last 51.1). Caixin Manufacturing PMI hit 51.8 (expected 51.5; last 51.7).
  • Japan's Q1 All Big Industry CAPEX was up 11.1% qtr/qtr (last 4.0%). Q2 Tankan Lare Manufacturers Index hit 13 (expected 11; last 11) and Big Manufacturers Index hit 14 (expected 13; last 10). Large Non-Manufacturers Index hit 27 (expected 31; last 27). June Manufacturing PMI hit 50.0 (expected 50.1; last 50.4). June Household Confidence improved to 36.4 from 36.2, as expected.
  • South Krea's June trade surplus reached $8.00 bln (expected surplus of $5.24 bln; last surplus of $4.86 bln) as imports fell 7.5% m/m (expected -2.2%; last -2.0%) and exports rose 5.1% yr/yr (expected 6.3%; last 11.7%). June Manufacturing PMI hit 52.0 (last 51.6).
  • India's June Manufacturing PMI hit 58.3 (expected 58.5; last 57.5).
  • Hong Kong's June Manufacturing PMI hit 51.8 (expected 51.5; last 51.7).
  • Singapore's Q2 URA Property Index was up 1.1% qtr/qtr (last 1.4%).
  • Australia's June Manufacturing PMI hit 47.2 (expected 47.5; last 49.7).
  • Eurozone's June Manufacturing PMI hit 45.8 (expected 45.6; last 47.3).
  • Germany's June Manufacturing PMI hit 43.5 (expected 43.4; last 45.4). June CPI was up 0.1% m/m (expected 0.2%; last 0.1%), rising 2.2% yr/yr (expected 2.3%; last 2.4%).
  • U.K.'s June Nationwide HPI was up 0.2% m/m (expected 0.0%; last 0.4%), rising 1.5% yr/yr (last 1.3%). June Manufacturing PMI hit 50.9 (expected 51.4; last 51.2). May Net Lending to Individuals reached GBP2.70 bln (expected GBP3.30 bln; last GBP3.10 bln).
  • France's June Manufacturing PMI hit 45.4 (expected 45.3; last 46.4).
  • Italy's June Manufacturing PMI hit 45.7 (expected 44.3; last 45.6).
  • Spain's June Manufacturing PMI hit 52.3 (expected 53.1; last 54.0).
  • Swiss May Retail Sales rose 0.4% yr/yr (expected 2.5%; last 2.2%). June procure.ch PMI hit 43.9 (last 46.4).
• Today's Data:
  • The June ISM Manufacturing Index checked in at 48.5% (Briefing.com consensus 49.1%) versus 48.7% in May. The dividing line between expansion and contraction is 50.0%, so the June reading suggests there was a faster pace of contraction in the manufacturing sector last month. This was the third straight month (and 19th out of 20) that economic activity in the manufacturing sector contracted.
    • The key takeaway from the report is that each component remained in a state of contraction -- except prices, which slowed from the prior month -- signaling a state of subdued activity for the manufacturing sector that fits with a slowing economy.
  • Total construction spending decreased 0.1% month-over-month in May (Briefing.com consensus 0.1%) following an upwardly revised 0.3% increase (from -0.1%) in April. Total private construction was down 0.3% month-over-month while total public construction was up 0.5% month-over-month. On a year-over-year basis, total construction spending was up 6.4%.
    • The key takeaway from the report was the drag in private residential spending that was driven by a decline in new single-family construction at a time when overall housing inventory has been constrained due to a lack of inventory for existing homes.
  • The S&P Global U.S. Manufacturing PMI hit 51.6 in the final reading for June, down from 51.7 in the preliminary reading, but up from May's final reading of 51.3.
• Commodities:
  • WTI crude: +2.4% to $83.46/bbl
  • Gold: UNCH at $2339.60/ozt
  • Copper: +0.5% to $4.41/lb
• Currencies:
  • EUR/USD: +0.2% to 1.0735
  • GBP/USD: UNCH at 1.2644
  • USD/CNH: +0.1% to 7.3046
  • USD/JPY: +0.4% to 161.47
• The Day Ahead:
  • 10:00 ET: May job openings (prior 8.059 mln)