Bond Market Update

Longer Tenors Climb Despite GDP Beat

• Longer-dated U.S. Treasuries rebounded on Thursday, defending their gains despite a stronger-than-expected advance reading of Q2 GDP (2.8%; Briefing.com consensus 1.9%), while shorter tenors gave back their opening gains. The trading day started on a firmly higher note after a night that saw weakness in global equity markets, an ongoing bounce in the Japanese yen, and strength in sovereign debt. South Korea's first contractionary GDP reading since Q4 of 2022 and poor quarterly results/guidance from STMicroelectronics and Stellantis contributed to the sudden growth concerns that were reflected in the markets, but the mood improved during the U.S. session thanks to a much stronger-than-expected advance Q2 GDP reading. Treasuries slid from their highs in immediate reaction to the report, followed by a bounce that took place alongside a weak open in equities, but the Treasury market ran into steady pressure once equities rebounded. The Treasury market bounced briefly after a strong $44 bln 7-yr note auction before facing more pressure into the close. This left the 2-yr note modestly lower for the day while longer tenors held onto roughly half of their initial gains. Crude oil slipped to its lowest level in nearly seven weeks while the U.S. Dollar Index returned to little changed at its 200-day moving average (104.35) after overcoming an intraday loss.
• Yield Check:
  • 2-yr: +2 bps to 4.44%
  • 3-yr: +1 bp to 4.26%
  • 5-yr: -1 bp to 4.15%
  • 10-yr: -3 bps to 4.26%
  • 30-yr: -5 bps to 4.50%

• News:
  • The People's Bank of China unexpectedly lowered its medium-term lending facility rate by 20 basis points to 2.30%.
  • There was ongoing speculation that the Bank of Japan will consider hiking rates at next week's policy meeting and could announce a plan to significantly reduce its asset purchases over the coming years.
  • German Chancellor Scholz indicated that he plans to run for another term next fall.
  • Fintech company Revolut received a banking license in the U.K.
  • Japan's July Corporate Services Price Index was up 3.0% yr/yr (expected 2.6%; last 2.7%).
  • South Korea's Q2 GDP contracted 0.2% qtr/qtr (expected 0.1%; last 1.3%) but grew 2.3% yr/yr (expected 2.5%; last 3.3%).
  • Hong Kong's June trade deficit reached $55.7 bln (last deficit of $12.1 bln) as imports rose 9.0% m/m (last 9.6%) and exports rose 10.7% m/m (last 14.8%).
  • Eurozone's June M3 Money Supply grew 2.2% yr/yr (expected 1.9%; last 1.6%), Private Sector Loans rose 0.3% yr/yr (expected 0.5%; last 0.3%), and Loans to nonfinancials increased 0.7% (last 0.3%).
  • Germany's July ifo Business Climate Index hit 87.0 (expected 88.9; last 88.6). July Current Assessment fell to 87.1 from 88.3 (expected 88.5) and Business Expectations fell to 86.9 from 88.8 (expected 89.0).
  • U.K.'s July CBI Industrial Trends Orders fell to -32 from -18 (expected -19).
  • France's July Business Survey fell to 95 from 99 (expected 99).
• Today's Data:
  • The Advance Q2 GDP report showed real GDP increasing at an annual rate of 2.8% (Briefing.com consensus 1.9%), following a 1.4% increase for the first quarter. The GDP Price Deflator was up 2.3% versus 3.1% in the first quarter.
    • The key takeaway from the report is that it didn't show any breakdown in consumer spending. In fact, consumer spending growth accelerated, increasing 2.3% on the heels of a 1.5% increase in the first quarter.
  • Initial jobless claims for the week ending July 20 decreased by 10,000 to 235,000 (Briefing.com consensus 240,000). Continuing jobless claims for the week ending July 13 decreased by 9,000 to 1.851 million.
    • The key takeaway from the report is that there hasn't been an alarming jump in initial claims -- a leading indicator -- to even higher levels; therefore, a conclusion will be drawn that the labor market is seeing some normal slowing as opposed to a rapid deterioration.
  • Durable goods orders in June sunk 6.6% month-over-month (Briefing.com consensus 0.4%). Excluding transportation, durable goods orders increased 0.5% month-over-month (Briefing.com consensus 0.2%).
    • The key takeaway from the report is that the weakness was driven by a large drop in nondefense aircraft and parts orders, which are volatile. An added takeaway is that business spending in June was quite solid, evidenced by the 1.0% increase in new orders for nondefense capital goods excluding aircraft.
  • Weekly natural gas inventories increased by 22 bcf after increasing by 10 bcf a week ago.
  • $44 bln 7-year Treasury note auction results (prior 12-auction average):
    • High yield: 4.162% (4.367%).
    • Bid-to-cover: 2.64 (2.54).
    • Indirect bid: 74.4% (68.2%).
    • Direct bid: 16.8% (17.4%).
• Commodities:
  • WTI crude: +0.9% to $78.27/bbl
  • Gold: -2.6% to $2354.90/ozt
  • Copper: +0.2% to $4.12/lb
• Currencies:
  • EUR/USD: +0.1% to 1.0846
  • GBP/USD: -0.4% to 1.2853
  • USD/CNH: -0.3% to 7.2430
  • USD/JPY: +0.1% to 153.85
• The Day Ahead:
  • 8:30 ET: June Personal Income (Briefing.com consensus 0.4%; prior 0.5%), Personal Spending (Briefing.com consensus 0.3%; prior 0.2%), PCE Prices (Briefing.com consensus 0.1%; prior 0.0%), and core PCE Prices (Briefing.com consensus 0.2%; prior 0.1%)
  • 10:00 ET: Final July University of Michigan Consumer Sentiment (Briefing.com consensus 66.0; prior 66.0)