Bond Market Update

Cooling CPI Sends Yields to Four-Month Lows 

• U.S. Treasuries broke out of this week's slumber with a Thursday rally back to levels from March in reaction to a cooler-than-expected CPI report for June (-0.1%; Briefing.com consensus 0.1%), which showed a deceleration in the year-over-year CPI growth rate to 3.0% from 3.3%. The trading day started on a flat note, but the market soared in immediate reaction to the report with shorter tenors leading the rally. The below-consensus reading increased the implied likelihood of a September cut to a near certainty (92.7% from 73.4% yesterday), pulled expectations for the second cut to November (55.5% from 35.5% yesterday) from December, and got the market thinking about a potential third cut in December. Treasuries added to their gains in mid-morning action with longer tenors taking the intraday lead. However, afternoon trade saw a pullback to levels seen in immediate reaction to the CPI report after the U.S. Treasury held a $22 bln 30-yr bond reopening, which met weak demand. Even with the post-auction backtracking, yields on 10s and shorter tenors finished the day at levels not seen since March. Crude oil added to yesterday's gain while the U.S. Dollar Index fell 0.5% to 104.49 as the dollar lost nearly 2.0% against the yen thanks in part to the Bank of Japan's reported intervention in the foreign exchange market, which lifted the Japanese currency off a near 38-year low against the greenback.
• Yield Check:
  • 2-yr: -12 bps to 4.51%
  • 3-yr: -12 bps to 4.27%
  • 5-yr: -12 bps to 4.12%
  • 10-yr: -9 bps to 4.19%
  • 30-yr: -7 bps to 4.40%

• News:
  • European Central Bank policymaker and Bank of France Governor Villeroy de Galhau cautioned that France cannot keep widening its budget deficit.
  • Italy is expected to reduce its planned debt sales for the second half of the year due to better-than-expected cash balance.
  • The Bank of Korea left its policy rate at 3.50%, as expected, though Governor Rhee acknowledged that the bank is preparing to "switch lanes," suggesting a rate cut is approaching.
  • Expectations are growing for the People's Bank of China to cut the reserve requirement ratio by 25 bps and lower the one-year loan prime rate by 10 bps before the end of Q3.
  • South Korea's exports through the first ten days of July were up 33.8% yr/yr with chip exports jumping 85.7%.
  • Japan's May Core Machinery Orders were down 3.2% m/m (expected 0.9%; last -2.9%) but up 10.8% yr/yr (expected 7.2%; last 0.7%).
  • Australia's July MI Inflation Expectations slowed to 4.3% from 4.4%.
  • Germany's June CPI was up 0.1% m/m, as expected (last 0.1%), rising 2.2% yr/yr, as expected (last 2.4%).
  • U.K.'s May GDP grew 0.4% m/m (expected 0.2%: last 0.0%), expanding 1.4% yr/yr (expected 1.2%; last 0.7%). May Construction Output was up 1.9% m/m (expected 0.5%; last -1.1%), rising 0.8% yr/yr (expected -1.9%; last -2.1%). May Industrial Production rose 0.2% m/m (expected 0.3%; last -0.9%), increasing 0.4% yr/yr (expected 0.6%; last -0.7%). May trade deficit reached GBP17.92 bln (expected deficit of GBP15.60 bln; last deficit of GBP19.44 bln).
• Today's Data:
  • Total CPI was down 0.1% month-over-month in June (Briefing.com consensus 0.1%) after no change in May. Core CPI, which excludes food and energy, was up 0.1% month-over-month (Briefing.com consensus 0.2%) after increasing 0.2% in May. On a year-over-year basis, total CPI was up 3.0%, versus 3.3% in May, while core CPI was up 3.3%, versus 3.4% in May.
    • The key takeaway from the report is that the market heard exactly what it hoped for, as CPI deflated slightly in June, contributing to additional disinflation on a year-over-year basis. The 3.0% year-over-year growth rate matched the low from 2023, which will be seen as supportive of a case for a rate cut from the FOMC.
  • Initial jobless claims for the week ending July 6 decreased by 17,000 to 222,000 (Briefing.com consensus 234,000) from last week's revised rate of 239,000 (from 238,000). Continuing jobless claims decreased by 4,000 to 1.852 million from last week's revised rate of 1.856 million (from 1.858 million).
    • The key takeaway from the report is that initial claims continued backtracking from a high that was reached in June, suggesting that the labor market is holding up well despite restrictive policy from the Fed.
  • The Treasury Budget for June showed a deficit of $66.0 billion compared to a deficit of $227.8 billion in the same period a year ago. The June deficit resulted from outlays ($532.2 billion) exceeding receipts ($466.3 billion). The Treasury Budget data is not seasonally adjusted so the June deficit cannot be compared to the May deficit of $347.1 billion.
    • The key takeaway from the report is that while the June deficit was much smaller than a year ago, it comes after a sharp year-over-year increase in the May deficit. As a result, the deficit between May and June increased by $413 billion after increasing by $468 billion between May and June 2023.
  • Weekly natural gas inventories increased by 65 bcf after increasing by 32 bcf a week ago.
  • $22 bln 30-year Treasury bond reopening results (prior 12-auction average):
    • High yield: 4.405% (4.405%).
    • Bid-to-cover: 2.30 (2.41).
    • Indirect bid: 60.8% (66.3%).
    • Direct bid: 23.4% (17.9%).
• Commodities:
  • WTI crude: +0.7% to $82.62/bbl
  • Gold: +1.8% to $2421.10/ozt
  • Copper: -1.7% to $4.51/lb
• Currencies:
  • EUR/USD: +0.4% to 1.0867
  • GBP/USD: +0.5% to 1.2912
  • USD/CNH: -0.3% to 7.2676
  • USD/JPY: -1.8% to 158.74
• The Day Ahead:
  • 8:30 ET: June PPI (Briefing.com consensus 0.1%; prior -0.2%) and Core PPI (Briefing.com consensus 0.1%; prior 0.0%)
  • 10:00 ET: Preliminary July University of Michigan Consumer Sentiment (Briefing.com consensus 67.5; prior 68.2)