Bond Market Update

July Gains Extended

• U.S. Treasuries finished July on a solid note, pressuring the 10-yr yield to its lowest settlement since mid-March while yields on shorter tenors ended the month at levels not seen since early February. Treasuries started the day with slight gains in longer tenors after a busy night, which featured a 15 basis-point rate hike and a taper announcement from the Bank of Japan, a full slate of economic data, and several news developments. Eurozone's flash CPI for July showed a slight acceleration in the yr/yr rate to 2.6% from 2.5% and China's manufacturing sector remained in slight contraction, according to the July Manufacturing PMI report (49.4; prior 49.5). Treasuries spent early action in a steady advance, climbing through the U.S. Treasury's announcement about this quarter's auction sizes. The morning rally sent yields to fresh lows for the month, though some late backtracking lifted the 30-yr yield a basis point above its low from July 17. The market had a mostly muted reaction to the July FOMC Statement and the press conference even though Fed Chairman Powell refused to commit to a September rate cut, which remains widely expected by the market. Crude oil bounced off its lowest level since early June, narrowing its July loss to $3.59 or 4.4%, while the U.S. Dollar Index fell 0.4% to 104.10, giving up 1.7% for the month.
• Yield Check:
  • 2-yr: -2 bps to 4.34% (-38 bps in July)
  • 3-yr: -3 bps to 4.14% (-37 bps in July)
  • 5-yr: -4 bps to 4.00% (-33 bps in July)
  • 10-yr: -3 bps to 4.11% (-23 bps in July)
  • 30-yr: -3 bps to 4.37% (-13 bps in July)

• News:
  • The U.S. Treasury announced that it will sell $125 bln in 3-, 10-, and 30-yr notes and bonds next week. The Treasury also announced that the sizes of 10-yr note, 20-yr bond, and 30-yr bond auctions will be reduced to levels from June and July after a $3 bln increase in August while sizes of 2-, 3-, 5-, and 7-yr note auctions will remain unchanged.
  • The U.S. Treasury confirmed that the size of its liquidity buyback will be doubled to $30 bln, as expected.
  • Shipments of advanced technology to China from Japan, Netherlands, and South Korea will be exempt from U.S. restrictions, according to Reuters.
  • The Biden administration is planning restrictions on sales of high-bandwidth memory chips to China, according to Bloomberg.
  • China's Politburo held a meeting to establish economic priorities for the second half of the year, shifting the focus toward boosting consumption.
  • The leader of Hamas was assassinated in Iran by an Israeli air strike just hours after Israel claimed to have killed Hezbollah's senior commander in Lebanon.
  • The Bank of England's Shadow Monetary Policy Committee is calling the Bank of England to hold its bank rate at 5.25% tomorrow.
  • China's July Manufacturing PMI hit 49.4, as expected (last 49.5) and Non-Manufacturing PMI hit 50.2 (expected 50.3; last 50.5).
  • Japan's June Industrial Production was down 3.6% m/m (expected -4.2%; last 3.6%) and June Retail Sales rose 3.7% yr/yr (expected 3.3%; last 2.8%). June Housing Starts fell 6.7% yr/yr (expected -2.3%; last -5.2%) and July Household Confidence rose to 36.7 from 36.4 (expected 36.5).
  • South Korea's June Industrial Production rose 0.5% m/m (expected -0.7%; last -0.6%), increasing 3.8% yr/yr (expected 2.3%; last 4.3%). June Retail Sales were up 1.0% m/m (last -0.2%) and Service Sector Output was up 0.2% m/m (last -0.8%).
  • Singapore's Q2 Unemployment Rate decreased to 2.0% from 2.1% and Q2 Business Expectations rose to 23.0 from 22.0.
  • Hong Kong's Q2 GDP contracted 0.4% qtr/qtr (expected 0.3%; last 2.3%) but grew 3.3% yr/yr (expected 2.7%; last 2.7%).
  • Australia's June Retail Sales were up 0.5% m/m (expected 0.2%; last 0.6%) but down 0.3% qtr/qtr (last -0.4%). June Monthly CPI Indicator slowed to 3.8% yr/yr from 4.0%, as expected.
  • New Zealand's Q2 CPI was up 1.0% qtr/qtr, as expected (last 1.0%), rising 3.8% yr/yr, as expected (last 3.6%). June Private Sector Credit was up 0.6% m/m (expected 0.4%; last 0.4%) and June Building Consents were down 13.8% m/m (last -1.9%).
  • Eurozone's flash July CPI was unchanged m/m (last 0.2%), rising 2.6% yr/yr (expected 2.5%; last 2.5%). July Core CPI was down 0.2% m/m (last 0.4%) but up 2.9% yr/yr (expected 2.8%; last 2.9%).
  • Germany's June Import Price Index was up 0.4% m/m (expected 0.1%; last 0.0%), rising 0.7% yr/yr (expected 0.5%; last -0.4%). July unemployment increased by 18,000 (expected 16,000; last 20,000) and Unemployment Rate remained at 6.0%, as expected.
  • France's flash July CPI was up 0.1% m/m (expected 0.3%; last 0.1%), rising 2.3% yr/yr (expected 2.4%; last 2.2%). June PPI was down 0.3% m/m (last -1.6%), falling 6.0% yr/yr (last -6.7%).
  • Italy's flash July CPI was up 0.5% m/m (expected 0.3%; last 0.1%), rising 1.3% yr/yr (expected 1.2%; last 0.8%). June PPI was up 0.7% m/m (last 0.3%) but down 2.5% yr/yr (last -3.5%).
  • Spain's May Current Account surplus reached EUR5.56 bln (last surplus of EUR2.83 bln).
  • Swiss July ZEW Expectations fell to 9.4 from 17.5.
• Today's Data:
  • The July ADP Employment Change Report showed 122,000 jobs were added to private-sector payrolls (Briefing.com consensus 160,000) following an upwardly revised 155,000 (from 150,000) in June. The 4.8% year-over-year gain for job-stayers was the slowest pace of growth in three years.
    • The key takeaway from the report is that it connotes a slowdown in private-sector hiring and pay, which is the right mix for furthering the market's belief that the Fed will cut rates in September.
  • The second quarter Employment Cost Index showed compensation costs for civilian workers increased 0.9% (Briefing.com consensus 1.0%), seasonally adjusted, for the three-month period ending in June 2024 versus1.2% for the three-month period ending in March 2024.
    • The key takeaway is that there was a year-over-year moderation in wages and salaries and benefit costs that, again, trended in the right matter to suggest the Fed might be convinced to cut rates in September.
  • Pending Home Sales rose 4.8% in June (Briefing.com consensus 1.5%) after decreasing a revised 1.9% (from -2.1%) in May.
  • The Chicago PMI hit 45.3 in July, down from 47.4 in June.
  • The weekly MBA Mortgage Index was down 3.9% after falling 2.2% a week ago. The Purchase Index was down 1.5% while the Refinance Index was down 7.2%.
  • Weekly crude oil inventories decreased by 3.44 mln barrels after decreasing by 3.74 mln barrels a week ago.
• Commodities:
  • WTI crude: +4.3% to $77.93/bbl
  • Gold: +0.9% to $2473.30/ozt
  • Copper: +2.2% to $4.18/lb
• Currencies:
  • EUR/USD: +0.2% to 1.0832
  • GBP/USD: +0.2% to 1.2864
  • USD/CNH: -0.2% to 7.2241
  • USD/JPY: -1.6% to 150.23
• The Day Ahead:
  • 8:30 ET: Weekly Initial Claims (Briefing.com consensus 233,000; prior 235,000), Continuing Claims (prior 1.851 mln), preliminary Q2 Productivity (Briefing.com consensus 1.6%; prior 0.2%), and preliminary Q2 Unit Labor Costs (Briefing.com consensus 1.7%; prior 4.0%)
  • 10:00 ET: June Construction Spending (Briefing.com consensus 0.1%; prior -0.1%) and July ISM Manufacturing (Briefing.com consensus 48.5%; prior 48.5%)
  • 10:30 ET: Weekly natural gas inventories (prior +22 bcf)