Bond Market Update

Solid Gains Ahead of Independence Day

• U.S. Treasuries finished the abbreviated Wednesday session with solid gains across the curve after overcoming a soft start. The 5-yr note and shorter tenors opened the day with slim losses while 10s and 30s outperformed, starting in positive territory. The entire complex climbed off today's starting levels after the first batch of economic data included a below-consensus ADP Employment Change report for June (150,000; Briefing.com consensus 163,000) and a larger-than-expected increase in weekly jobless claims (to 238,000 from 234,000; Briefing.com consensus 235,000). Treasuries continued inching higher for the next hour, vaulting to fresh highs after the ISM Non-Manufacturing Index for June (48.8%; Briefing.com consensus 52.5%) showed an unexpected contraction in activity in the services sector. The post-ISM surge sent 10s and shorter tenors back below their respective 200-day moving averages, leaving the 10-yr yield up just two basis points for the week while the 2-yr yield is now unchanged from its settlement from Friday. Today's soft string of data prompted the Atlanta Fed to lower its GDPNow forecast for Q2 GDP to 1.5% from 1.7% while the implied likelihood of a rate cut at the September FOMC meeting rose to 72.6% from 68.9% yesterday and 62.3% a week ago. The market did not have a chance to react to the FOMC Minutes from the June policy meeting, which crossed the wires just as the session ended, showing a discussion about a potential need for a rate hike. Crude oil climbed but remained below yesterday's intraday high (84.38) while the U.S. Dollar Index fell 0.4% to 105.35 with its 50-day moving average (105.15) right below. Happy Independence Day!
• Yield Check:
  • 2-yr: -2 bps to 4.72%
  • 3-yr: -6 bps to 4.49%
  • 5-yr: -7 bps to 4.32%
  • 10-yr: -8 bps to 4.36%
  • 30-yr: -8 bps to 4.53%

• News:
  • President Biden has told a party ally that he is weighing whether to stay in the presidential race, according to The New York Times.
  • The U.K.'s snap election will take place tomorrow with the ruling Conservative party expected to be dealt a major defeat.
  • Sweden's Riksbank expects two or three rate cuts in the second half, according to the policy Minutes from the June meeting.
  • Leaders from China and Türkiye met with Russian President Putin in Kazakhstan today.
  • South Korea's finance ministry raised its domestic growth forecast for the year to 2.6% from 2.2%.
  • China's June Caixin Services PMI hit 51.2 (expected 53.4; last 54.0).
  • Japan's June Services PMI hit 49.4 (expected 49.8; last 53.8).
  • India's June Services PMI hit 60.5 (expected 60.4; last 60.2).
  • Australia's June AIG Construction Index improved to -23.2 from -68.1 and AIG Manufacturing Index rose to -26.5 from -31.1. June Services PMI hit 51.2 (expected 50.6; last 52.5). May Building Approvals were up 5.5% m/m (expected 1.5%; last 1.9%), rising 15.0% yr/yr (last 28.1%). May Private House Approvals increased 2.1% m/m (last -0.3%) and May Retail Sales grew 0.6% m/m (expected 0.3%; last 0.1%).
  • Eurozone's June Services PMI hit 52.8 (expected 52.6; last 53.2). May PPI was down 0.2% m/m (expected -0.1%; last -1.0%), falling 4.2% yr/yr (expected -4.1%; last -5.7%).
  • Germany's June Services PMI hit 53.1 (expected 53.5; last 54.2).
  • U.K.'s June Services PMI hit 52.1 (expected 51.2; last 52.9).
  • France's May government budget deficit reached EUR113.5 bln (last deficit of EUR91.6 bln). June Services PMI hit 49.6 (expected 48.8; last 49.3).
  • Italy's June Services PMI hit 53.7 (expected 53.9; last 54.2).
  • Spain's June Services PMI hit 56.8 (expected 56.5; last 56.9).
• Today's Data:
  • The ISM Non-Manufacturing Index decreased to 48.8% in June (Briefing.com consensus 52.5%) from 53.8% in May. The dividing line between expansion and contraction is 50.0%, so the June reading reflects services sector activity contracting (for the second time in the last three months). 
    • The key takeaway from the report is that it signals a contraction in activity in the nation's largest sector, which should reinforce the market's expectation that the Fed will start cutting rates before the end of the year.
  • Factory orders declined 0.5% month-over-month in May (Briefing.com consensus 0.3%) following a downwardly revised 0.4% increase (from 0.7%) in April. Excluding transportation, factory orders declined 0.7% on the heels of a 0.5% increase in April. Shipments of manufactured goods also fell 0.7% after increasing 0.84% in April.
    • The key takeaway from the report is that business spending dropped off in May, which is consistent with a slowdown in manufacturing activity that was seen in the advance report for durable goods.
  • The ADP Employment Change Report for June showed 150,000 positions added to private-sector payrolls (Briefing.com consensus 163,000), led by a 63,000 in leisure/hospitality, Gains were registered by small businesses (5,000), medium establishments (88,000), and large companies (58,000).
    • The key takeaway from the report is the recognition that both growth in private-sector payrolls and pay has slowed. Year-over-year pay gains for job stayers was 4.9%, the slowest since August 2021. Year-over-year pay gains for job changers slowed to 7.7%.
  • The trade deficit widened to $75.1 billion in May (Briefing.com consensus -$76.0 billion) from an upwardly revised $74.5 billion (from -$74.6 billion) in April. That was result of export being $1.8 billion less than April exports and imports being $1.2 billion less than April imports.
    • The key takeaway from the report is that there were declines in both exports and imports, signaling that trade demand overall was softer in May.
  • Initial jobless claims for the week ending June 29 increased 4,000 to 238,000 (Briefing.com consensus 235,000). Continuing jobless claims increased 26,000 to 1.858 million, hitting their highest level since November 27, 2021.
    • The key takeaway from the report is that initial jobless claims have kicked up a notch but continue to track comfortably below recession levels; however, it is apparent in continuing jobless claims that finding a new job after being laid off isn't as easy as it used to be, which is consistent with some slowing in the labor market.
  • The S&P Global U.S. Services PMI hit 55.3 in the final reading for June, up from 55.1 in the flash reading and May's final reading of 54.8.
  • The weekly MBA Mortgage Index was down 2.6% to follow last week's 0.8% increase. The Purchase Index fell 3.3% while the Refinance Index was down 1.5%.
  • Weekly crude oil inventories decreased by 12.16 mln barrels after increasing by 3.59 mln barrels a week ago.
  • Weekly natural gas inventories increased by 32 bcf after increasing by 52 bcf a week ago.
• Commodities:
  • WTI crude: +0.7% to $83.41/bbl
  • Gold: +1.5% to $2368.80/ozt
  • Copper: +2.5% to $4.53/lb
• Currencies:
  • EUR/USD: +0.3% to 1.0781
  • GBP/USD: +0.4% to 1.2737
  • USD/CNH: UNCH at 7.3030
  • USD/JPY: +0.1% to 161.53
• The Day Ahead:
  • Bond and equity markets closed for Independence Day tomorrow
  • Friday 8:30 ET: June Nonfarm Payrolls (Briefing.com consensus 185,000; prior 272,000), Nonfarm Private Payrolls (Briefing.com consensus 160,000; prior 229,000), Average Hourly Earnings (Briefing.com consensus 0.3%; prior 0.4%), Unemployment Rate (Briefing.com consensus 4.0%; prior 4.0%), and Average Workweek (Briefing.com consensus 34.3; prior 34.3)