Bond Market Update

2-Yr Yield Nears January Low

• U.S. Treasuries rallied strongly on Thursday, sending yields on the 5-yr note and shorter tenors to within striking distance of their lows from the start of the year ahead of tomorrow's release of the Employment Situation report for July. Treasuries opened the day with strong gains across the curve after rallying strongly in the futures market after yesterday's cash close. The advance was supported by a night of soft economic data, including China's Caixin Manufacturing PMI (49.8), which fell into contraction for the first time since October and Australia's Manufacturing PMI (47.5), which remained below 50.0 for the sixth month in a row. In Europe, final July Manufacturing PMI readings from Italy (47.4), France (44.0), and Germany (43.2) remained in contraction while Spain (51.0) and the U.K. (52.1) reported modest growth. In addition, the Bank of England started its easing campaign with a 25-bps rate cut to 5.00%, though the decision was a close call. Treasuries added to their starting gains in morning trade even though today's initial batch of data included a welcome combination of above-consensus preliminary Q2 productivity growth (2.3%; Briefing.com consensus 1.6%) and below-consensus unit labor cost growth (0.9%; Briefing.com consensus 1.7%). Treasuries continued climbing as the morning went on with most tenors reaching their best levels in immediate reaction to the ISM Manufacturing Index for July (46.8%; Briefing.com consensus 48.5%), which showed an accelerating contraction. Treasuries remained near their highs into the afternoon as stocks struggled with the technology sector showing considerable weakness. Today's advance left the 2-yr yield just five basis points above its intraday low from January. The rapid pace of the recent rally will likely translate into concerns about growth, especially if shorter tenors see continued strength that pressures their yields to fresh lows for the year. Crude oil gave back the bulk of yesterday's advance after finding resistance near its 200-day moving average (78.64) while the U.S. Dollar Index rose 0.3% to 104.42.
• Yield Check:
  • 2-yr: -18 bps to 4.16%
  • 3-yr: -17 bps to 3.97%
  • 5-yr: -16 bps to 3.84%
  • 10-yr: -13 bps to 3.98%
  • 30-yr: -10 bps to 4.27%
• News:
  • The Atlanta Fed's GDPNow forecast for Q3 GDP was lowered to 2.5% from 2.8%.
  • China Securities Daily speculated that the reserve requirement ratio could be reduced as early as this quarter.
  • China's July Caixin Manufacturing PMI hit 49.8 (expected 51.4; last 51.8).
  • Japan's July Manufacturing PMI hit 49.1 (expected 49.2; last 50.0).
  • South Korea's June trade surplus reached $3.62 bln (expected surplus of $5.00 bln; last surplus of $7.99 bln) as imports grew 10.5% yr/yr (expected 13.4%; last -7.5%) and exports rose 13.9% yr/yr (expected 18.4%; last 5.1%). July Manufacturing PMI hit 51.4 (last 52.0).
  • India's July Manufacturing PMI hit 58.1 (expected 59.0; last 58.3).
  • Hong Kong's June Retail Sales were down 9.7% yr/yr (last -11.5%).
  • Australia's July Manufacturing PMI hit 47.5 (expected 47.4; last 47.2). June trade surplus reached AUD5.589 bln (expected AUD5.080 bln; last AUD5.052 bln) as imports grew 0.5% m/m (last 3.3%) and exports rose 1.7% m/m (last 1.3%). Q2 Import Price Index was up 1.0% qtr/qtr (expected -0.9%; last -1.8%) and Export Price Index was down 5.9% qtr/qtr (last -2.1%).
  • Eurozone's July Manufacturing PMI hit 45.8 (expected 45.6; last 45.8) and July Unemployment Rate rose to 6.5% from 6.4% (expected 6.4%).
  • Germany's July Manufacturing PMI hit 43.2 (expected 42.6; last 43.5).
  • U.K.'s July Nationwide HPI was up 0.3% m/m (expected 0.1%; last 0.2%), rising 2.1% yr/yr (expected 1.8%; last 1.5%). July Manufacturing PMI hit 52.1 (expected 51.8; last 50.9).
  • France's July Manufacturing PMI hit 44.0 (expected 44.1; last 45.4).
  • Italy's July Manufacturing PMI hit 47.4 (expected 46.0; last 45.7) and June Unemployment Rate rose to 7.0% from 6.9% (expected 6.8%).
  • Spain's July Manufacturing PMI hit 51.0 (expected 52.5; last 52.3).
• Today's Data:
  • The July ISM Manufacturing Index checked in at 46.8% (Briefing.com consensus 48.5%) versus 48.5% in June. The dividing line between expansion and contraction is 50.0%, so the July reading suggests there was a faster pace of contraction in the manufacturing sector last month. This was the fourth straight month (and 20th out of 21) that economic activity in the manufacturing sector contracted.
    • The key takeaway from the report is that it conveys clear weakness in the manufacturing sector that is a byproduct of subdued demand.
  • Nonfarm business sector labor productivity increased 2.3% in the second quarter (Briefing.com consensus 1.6%) following an upwardly revised 0.4% increase (from 0.2%) in the first quarter. Unit labor costs were up just 0.9% (Briefing.com consensus 1.7%) following a downwardly revised 3.8% increase (from 4.0%) in the first quarter.
    • The key takeaway from the report was the moderation in unit labor costs, which the Fed is eyeing closely. Unit labor costs increased 0.5% over the last four quarters, which is the lowest rate since the third quarter of 2019.
  • Initial jobless claims for the week ending July 27 increased by 14,000 to 249,000 (Briefing.com consensus 233,000). Continuing jobless claims for the week ending July 20 increased by 33,000 to 1.877 million. That is the highest level since November 27, 2021.
    • The key takeaway from the report is the rising level of initial claims -- a leading indicator -- which connotes some softening in the labor market that is expected to curtail discretionary spending activity.
  • Total construction spending declined 0.3% month-over-month in June (Briefing.com consensus 0.1%) following a downwardly revised 0.4% decline (from -0.1%) in May. Total private construction was down 0.3% month-over-month while total public construction was down 0.4% month-over-month. On a year-over-year basis, total construction spending was up 6.2%.
    • The key takeaway from the report was that construction spending was soft across both the private and public sectors, reflecting weaker demand patterns that are part of a softening economy.
  • The S&P Global U.S. Manufacturing PMI hit 49.6 in the final reading for July, up from 49.5 in the preliminary reading, but down from 51.6 in June.
  • Weekly natural gas inventories increased by 18 bcf after increasing by 22 bcf a week ago.
• Commodities:
  • WTI crude: -2.1% to $76.26/bbl
  • Gold: +0.3% to $2480.30/ozt
  • Copper: -2.4% to $4.08/lb
• Currencies:
  • EUR/USD: -0.4% to 1.0784
  • GBP/USD: -1.0% to 1.2729
  • USD/CNH: +0.4% to 7.2530
  • USD/JPY: -0.2% to 149.57
• The Day Ahead:
  • 8:30 ET: July Nonfarm Payrolls (Briefing.com consensus 170,000; prior 206,000), Nonfarm Private Payrolls (Briefing.com consensus 153,000; prior 136,000), Average Hourly Earnings (Briefing.com consensus 0.3%; prior 0.3%), Unemployment Rate (Briefing.com consensus 4.1%; prior 4.1%), and Average Workweek (Briefing.com consensus 34.3; prior 34.3)
  • 10:00 ET: June Factory Orders (Briefing.com consensus 0.4%; prior -0.5%)