Bond Market Update

 Longer Tenors Recover From Midweek Swoon

• U.S. Treasuries finished the week on a firmly higher note, sending the 2-yr yield to its lowest closing level since early February while yields on longer tenors stayed above their July lows. The 10-yr note and the 30-yr bond underperformed earlier this week, but they bounced yesterday and maintained their relative strength into this morning. The outperformance gap reversed during the day with shorter tenors edging ahead after the release of the Personal Income/Outlays report for June, which was supportive of the argument for a September rate cut. The report showed that the core PCE Price Index remained at 2.6% yr/yr for the second month in a row while headline PCE dipped to 2.5% from 2.6% yr/yr. Treasuries reached session highs about an hour after the report's release, spending the remainder of the day in a narrow range just below their highs. This week's outperformance in shorter tenors expanded the 2s10s spread by eight basis points to -19 bps while the 2s30s spread emerged from inversion, expanding by 13 basis points to 7 bps. Crude oil faced renewed pressure, giving up $1.61/bbl for the week, while the U.S. Dollar Index (104.32) was little changed for the day and for the week, remaining near its 200-day moving average (104.34).
• Yield Check:
  • 2-yr: -5 bps to 4.39% (-12 bps this week)
  • 3-yr: -6 bps to 4.20% (-8 bps this week)
  • 5-yr: -7 bps to 4.08% (-8 bps this week)
  • 10-yr: -6 bps to 4.20% (-4 bps this week)
  • 30-yr: -4 bps to 4.46% (+1 bp this week)

• News:
  • The Atlanta Fed's GDPNow forecast for Q3 GDP was initiated at 2.8%.
  • The Bank of England will meet next week and the expectations for a rate cut are now essentially a toss-up.
  • The U.K. is looking at a GBP19 bln budget gap.
  • German steelmaker Thyssenkrupp lowered its revenue guidance for the year.
  • The Central Bank of Russia raised its policy rate by 200 bps to 18.00%, as expected.
  • The Chinese government plans CNY300 bln in special bonds for a trade-in program for old industrial and household appliances.
  • The Monetary Authority of Singapore made no changes to its policy stance.
  • Japan's July Tokyo CPI was up 2.2% yr/yr (expected 2.3%; last 2.3%) and Tokyo Core CPI was up 2.2% yr/yr, as expected (last 2.1%). May Leading Index rose to 111.2 from 110.9 (expected 111.1) and Coincident Indicator was up 1.9% m/m (expected 1.3%; last 1.0%).
  • Singapore's Q2 URA Property Index rose 0.9% qtr/qtr (expected 1.1%; last 1.4%). June Industrial Production fell 3.8% m/m (expected -0.5%; last 0.5%), decreasing 3.9% yr/yr (expected 0.0%; last 2.3%).
  • France's July Consumer Confidence rose to 91 from 90 (expected 90).
  • Italy's July Consumer Confidence rose to 98.9 from 98.3 (expected 98.0) and Business Confidence rose to 87.6 from 86.9 (expected 87.0).
  • Spain's June Retail Sales rose 0.3% yr/yr (last 0.2%). Q2 Unemployment Rate fell to 11.27% from 12.3% (expected 11.4%).
• Today's Data:
  • Personal income increased 0.2% month-over-month in June (Briefing.com consensus 0.4%) following a downwardly revised 0.4% increase (from 0.5%) in May. Personal spending increased 0.3% month-over-month (Briefing.com consensus 0.3%). The PCE Price Index was up 0.1% month-over-month and the core-PCE Price Index, which excludes food and energy, was up 0.2%. Both were in-line with expectations. Those increases left the PCE Price Index up 2.5% year-over-year, versus 2.6% in May, and the core-PCE Price Index up 2.6% year-over-year, unchanged from May.
    • The key takeaway from the report is that the price indexes didn't worsen on a year-over-year basis (i.e., move higher relative to the prior month). Consequently, they didn't give the market any reason to think the Fed will not cut rates at its September FOMC meeting considering comments from Fed officials, who knew where the May PCE price readings stood, have been teeing up that possibility.
  • The final Index of Consumer Sentiment for July stretched to 66.4 (Briefing.com consensus 66.0) from the preliminary reading of 66.0. The final reading for June was 68.2. In the same period a year ago, the index stood at 71.5.
    • The key takeaway from the report is that there weren't any real notable changes in consumer sentiment, which has been rightfully described as guarded as consumers continue to deal with inflation, election uncertainty, higher interest rates, and some softening in the labor market.
• Commodities:
  • WTI crude: -1.5% to $77.08/bbl (-2.1% this week)
  • Gold: +1.1% to $2381.50/ozt (-0.8% this week)
  • Copper: -0.2% to $4.11/lb (-3.1% this week)
• Currencies:
  • EUR/USD: +0.1% to 1.0858
  • GBP/USD: +0.2% to 1.2873
  • USD/CNH: +0.3% to 7.2616
  • USD/JPY: -0.1% to 153.74
• The Week Ahead:
  • Monday: Nothing of note
  • Tuesday: May FHFA Housing Price Index (prior 0.2%) and May S&P Case-Shiller Home Price Index (prior 7.2%) at 9:00 ET; and July Consumer Confidence (prior 100.4) at 10:00 ET
  • Wednesday: Weekly MBA Mortgage Index (prior -2.2%) at 7:00 ET; July ADP Employment Change (prior 152,000) at 8:15 ET; Q2 Employment Cost Index (prior 1.2%) at 8:30 ET; June Pending Home Sales (prior -2.1%) at 10:00 ET; weekly crude oil inventories (prior (-3.74 mln) at 10:30 ET; and July FOMC Rate Decision (prior 5.25-5.50%) at 14:00 ET
  • Thursday: Weekly Initial Claims (prior 235,00), Continuing Claims (prior 1.851 mln), preliminary Q2 Productivity (prior 0.2%), and preliminary Q2 Unit Labor Costs (prior 4.0%) at 8:30 ET; June Construction Spending (prior -0.1%) and July ISM Manufacturing (prior 48.5%) at 10:00 ET; and weekly natural gas inventories (prior +22 bcf) at 10:30 ET
  • Friday: July Nonfarm Payrolls (prior 206,000), Nonfarm Private Payrolls (prior 136,000), Average Hourly Earnings (prior 0.3%), Unemployment Rate (prior 4.1%), and Average Workweek (prior 34.3) at 8:30 ET; and June Factory Orders (prior -0.5%) at 10:00 ET