Bond Market Update

Four-Month Highs Sustained Despite Hot PPI

• U.S. Treasuries finished a solid week with a resilient showing that kept yields on 10s and shorter tenors at their lowest levels since March. The trading day started with modest losses after a night that saw the release of a larger than expected trade surplus from China (99.1 bln; expected $85.1 bln) and France's June CPI (2.2% yr/yr; expected 2.1%), which was a bit hotter than expected. The initial losses were extended in immediate reaction to the PPI report, which not only included hotter-than-expected headline (0.2%; Briefing.com consensus 0.1%) and core (0.4%; Briefing.com consensus 0.1%) readings for June but also showed upward revisions to May's figures. However, the post-data selling was short lived, with the action providing another example of the market's resiliency that has been on display over the past couple months. Treasuries returned to their starting levels before 9:00 ET with shorter tenors rising into positive territory and building on their gains into the close while 10s and 30s underperformed, but still managed a slightly higher finish. Longer tenors lagged throughout the week, which expanded the 2s10s spread by six basis points to -27 bps since last Friday's settlement. Crude oil briefly turned positive for the week but ended up giving up about $1/bbl for the week while the U.S. Dollar Index fell 0.3% to 104.09, sliding past its 200-day moving average (104.44) back to its June low. The Index lost 0.8% this week.
• Yield Check:
  • 2-yr: -5 bps to 4.46% (-14 bps for the week)
  • 3-yr: -4 bps to 4.23% (-16 bps for the week)
  • 5-yr: -1 bp to 4.11% (-11 bps for the week)
  • 10-yr: UNCH at 4.19% (-8 bps for the week)
  • 30-yr: UNCH at 4.40% (-7 bps for the week)

• News:
  • Citigroup (C), JPMorgan Chase (JPM), and Wells Fargo (WFC) beat their respective earnings expectations for Q2.
  • Reserve Bank of India Governor Das said that it is too early to discuss rate cuts.
  • Reports from France suggest that left wing parties have not been able to agree on a candidate for prime minister.
  • There is some growing political uncertainty in Spain after Vox Party withdrew from five regional coalition governments with People's Party due to a dispute over migration.
  • Norwegian Air reported stronger than expected results for Q2.
  • Swiss nylon manufacturer EMS Chemie lowered its guidance for the year due to a strong franc and the lack of improvement in global manufacturing.
  • China's June trade surplus reached $99.05 bln (expected surplus of $85.10 bln; last surplus of $82.62 bln) as imports fell 2.3% yr/yr (expected 2.8%; last 1.8%) and exports rose 8.6% yr/yr (expected 8.0%; last 7.6%). June M2 Money Stock was up 6.2% yr/yr (expected 6.8%; last 7.0%), June New Loans totaled CNY2.13 trln (expected CNY1.05 trln; last CNY950.0 bln), and June total social financing reached CNY3.30 trln (last CNY2.07 trln). June FDI was down 29.1% YTD (last -28.2%).
  • Japan's May Industrial Production rose 3.6% m/m (expected 2.8%; last -0.9%) and Capacity Utilization was up 4.1% m/m (last 0.3%).
  • India's June CPI was up 5.08% yr/yr (expected 4.80%; last 4.80%) and May Industrial Production grew 5.9% yr/yr (expected 4.9%; last 5.0%).
  • Singapore's Q2 GDP expanded 0.4% qtr/qtr (last 0.3%), growing 2.9% yr/yr (expected 2.7%; last 3.0%).
  • New Zealand's June Business NZ PMI hit 41.1 (last 47.2). June Electronic Card Retail Sales were down 0.6% m/m (last -1.2%), falling 4.9% yr/yr (last -1.6%).
  • Germany's June WPI was down 0.3% m/m (expected 0.2%; last 0.1%) but up 0.6% yr/yr (last -0.7%).
  • France's June CPI was up 0.1% m/m, as expected (last 0.0%), rising 2.2% yr/yr (expected 2.1%; last 2.3%).
  • Spain's June CPI was up 0.4% m/m (expected 0.3%; last 0.3%), rising 3.4% yr/yr, as expected (last 3.6%). Core CPI was up 3.0% yr/yr, as expected (last 3.0%).
• Today's Data:
  • The Producer Price Index for final demand increased 0.2% month-over-month in June (Briefing.com consensus 0.1%) following a revised no change in May (from -0.2%). The index for final demand, less food and energy ("core PPI"), was up 0.4% month-over-month (Briefing.com consensus 0.1%) after a revised 0.3% increase (from 0.0%) in May. On a year-over-year basis, the index for final demand was up 2.6% versus 2.2% in May, and the index for final demand, less food and energy, was up 3.0%, versus 2.3% in May.
    • The key takeaway from the report is that the year-over-year rate for PPI and core PPI accelerated for the fifth month out of the last six with rising prices of services outweighing falling prices of goods in June.
  • The preliminary Index of Consumer Sentiment for July hit 66.0 (Briefing.com consensus 67.5), down from June's final reading of 68.2. In the same period a year ago, the index stood at 71.5.
    • The key takeaway from the report was that it showed little change relative to June, as many consumers remained burdened by high prices, though inflation expectations dipped slightly.
• Commodities:
  • WTI crude: -0.5% to $82.19/bbl
  • Gold: UNCH at $2420.40/ozt
  • Copper: +1.8% to $4.593/lb
• Currencies:
  • EUR/USD: +0.4% to 1.0906
  • GBP/USD: +0.6% to 1.2986
  • USD/CNH: +0.1% to 7.2716
  • USD/JPY: -0.7% to 157.86
• The Week Ahead:
  • Monday: July Empire State Manufacturing survey (Briefing.com consensus -6.0; prior -6.0) at 8:30 ET
  • Tuesday: June Retail Sales (Briefing.com consensus -0.1%; prior 0.1%), Retail Sales ex-auto (Briefing.com consensus 0.2%; prior -0.1%), June Import Prices (prior -0.4%), Import Prices ex-oil (prior -0.3%), Export Prices (prior -0.6%), and Export Prices ex-agriculture (prior -0.8%) at 8:30 ET; May Business Inventories (Briefing.com consensus 0.3%; prior 0.3%) and July NAHB Housing Market Index (Briefing.com consensus 44; prior 43) at 10:00 ET
  • Wednesday: Weekly MBA Mortgage Index (prior -0.2%) at 7:00 ET; June Housing Starts (Briefing.com consensus 1.310 mln; prior 1.277 mln) and Building Permits (Briefing.com consensus 1.391 mln; prior 1.386 mln) at 8:30 ET; June Industrial Production (Briefing.com consensus 0.3%; prior 0.9%) and Capacity Utilization (Briefing.com consensus 78.6%; prior 78.7%) at 9:15 ET; weekly crude oil inventories (prior -3.44 mln) at 10:30 ET; and $13 bln 20-yr Treasury bond reopening results at 13:00 ET
  • Thursday: Weekly Initial Claims (Briefing.com consensus 225,000; prior 222,000), Continuing Claims (prior 1.852 mln), and July Philadelphia Fed survey (Briefing.com consensus 2.9; prior 1.3) at 8:30 ET; June Leading Indicators (Briefing.com consensus -0.3%; prior -0.5%) at 10:00 ET; weekly natural gas inventories (prior +65 bcf) at 10:30 ET; and May Net Long-Term TIC Flows (prior $123.1 bln) at 16:00 ET
  • Friday: Nothing of note