Bond Market Update

Treasuries Remain Resilient

• U.S. Treasuries finished the midweek session on a slightly higher note after putting on another display of intraday resilience. The trading day started with losses that were paced by shorter tenors. The market faced some additional pressure after it was reported that Housing Starts (1.353 mln; Briefing.com consensus 1.310 mln; prior 1.314 mln) and Building Permits (1.446 mln; Briefing.com consensus 1.391 mln; prior 1.399 mln) exceeded expectations for June. The early pressure drove the 5-yr yield toward yesterday's high, where the market found support. Treasuries marked lows shortly after 10:00 ET, bouncing with verve as equities fell amid profit taking in high-flying chip stocks while regional banks showed a continuation of their recent strength. The bounce continued as the day went on, receiving some help from a solid $13 bln 20-yr bond reopening. Today's advance left the 30-yr yield within a basis point of its lowest settlement from June (4.351%) while 10s and shorter tenors inched to fresh highs for the month. Crude oil bounced from three down days, turning positive for the week, with help from dollar weakness that sent the U.S. Dollar Index lower by 0.5% to 103.76.
• Yield Check:
  • 2-yr: -1 bp to 4.43%
  • 3-yr: -1 bp to 4.20%
  • 5-yr: -2 bps to 4.07%
  • 10-yr: -2 bps to 4.15%
  • 30-yr: -2 bps to 4.36%

• News:
  • The Federal Reserve's Beige Book for July described overall economic activity during the last reporting cycle as growing at a slight to modest pace. Seven Districts reported growth while five saw flat or declining activity. Wages grew at a modest to moderate pace while prices rose modestly. There was little change in household spending while auto sales varied across different Districts. Travel and tourism grew as expected while manufacturing activity varied.
  • The Biden administration is planning additional restrictions on chip sales to China, according to Bloomberg.
  • Key chip equipment manufacturer ASML (ASML) reported solid results for Q2 that were marred by soft guidance for Q3.
  • The Atlanta Fed's GDPNow forecast for Q2 GDP was revised up to 2.7% from 2.5% in the previous estimate.
  • Fed Governor (FOMC voter) Waller said that the time for a rate cut is approaching and that the current level of upside risk to unemployment has not been seen for a while.
  • The U.S. Treasury postponed today's scheduled buyback operation to tomorrow.
  • The International Monetary Fund raised its 2025 global growth forecast to 3.3% from 3.2%.
  • Cooler-than-expected Q2 inflation in New Zealand has pulled rate cut expectations to October/November.
  • Japan's July Reuters Tankan Index hit 11 (last 6).
  • Singapore's June trade surplus reached $3.078 bln (last surplus of $4.282 bln) as non-oil exports fell 0.4% m/m (expected 4.1%; last -0.7%), decreasing 8.7% yr/yr (expected -1.2%; last -0.7%).
  • Australia's June MI Leading Index was unchanged m/m (last 0.0%).
  • New Zealand's Q2 CPI was up 0.4% qtr/qtr (expected 0.5%; last 0.6%), growing 3.3% yr/yr (expected 3.5%; last 4.0%).
  • Eurozone's June CPI was up 0.2% m/m, as expected (last 0.2%), rising 2.5% yr/yr, as expected (last 2.6%). June core CPI was up 0.4% m/m (expected 0.3%; last 0.4%), rising 2.9% yr/yr, as expected (last 2.9%).
  • U.K.'s June CPI was up 0.1% m/m, as expected (last 0.3%), rising 2.0% yr/yr (expected 1.9%; last 2.0%). June Core CPI was up 0.2% m/m (expected 0.1%; last 0.5%), rising 3.5% yr/yr (expected 3.4%; last 3.5%). Input PPI was down 0.8% m/m (expected 0.1%; last -0.6%) and Output PPI was down 0.3% m/m (expected 0.1%; last -0.1%). June House Prices were up 2.2% yr/yr (expected 1.5%; last 1.3%).
• Today's Data:
  • Total housing starts in June increased 3.0% month-over-month from a depressed base to a seasonally adjusted annual rate of 1.353 million (Briefing.com consensus 1.310 million); however, single-unit starts were down 2.2%. Total building permits jumped 3.4% month-over-month to a seasonally adjusted annual rate of 1.446 million (Briefing.com consensus 1.391 million); however, permits for single units -- a leading indicator -- were down 2.3%.
    • The key takeaway from the report is that, while it might have been better than expected relative to consensus estimates, it was not a strong report nor a particularly encouraging report for an inventory-constrained housing market in need of lower-priced, single-family homes.
  • Total industrial production increased 0.6% month-over-month in June (Briefing.com consensus 0.3%) following an upwardly revised 0.9% increase (from 0.7%) in May. The capacity utilization rate jumped to 78.8% (Briefing.com consensus 78.6%) from an upwardly revised 78.3% (from 78.2%) in May. Total industrial production was up 1.6% yr/yr while the capacity utilization rate was 0.9 percentage point below its long-run average.
    • The key takeaway from the report was the continued increase in manufacturing output, which fits with an economy that isn't pacing for a hard landing.
  • Weekly crude oil inventories decreased by 4.87 mln barrels after decreasing by 3.44 mln barrels a week ago.
  • $13 bln 20-year Treasury bond reopening results (prior 12-auction average):
    • High yield: 4.466% (4.569%).
    • Bid-to-cover: 2.68 (2.62).
    • Indirect bid: 77.2% (69.5%).
    • Direct bid: 14.3% (19.1%).
• Commodities:
  • WTI crude: +2.8% to $82.84/bbl
  • Gold: -0.3% to $2460.40/ozt
  • Copper: -1.1% to $4.41/lb
• Currencies:
  • EUR/USD: +0.3% to 1.0937
  • GBP/USD: +0.3% to 1.3007 
  • USD/CNH: -0.2% to 7.2719
  • USD/JPY: -1.4% to 156.13
• The Day Ahead:
  • 8:30 ET: 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)
  • 10:00 ET: June Leading Indicators (Briefing.com consensus -0.3%; prior -0.5%)
  • 10:30 ET: Weekly natural gas inventories (prior +65 bcf)
  • 16:00 ET: May Net Long-Term TIC Flows (prior $123.1 bln)