Bond Market Update

Falling Inflation Expectations Offer Intraday Boost

• U.S. Treasuries staged a quiet advance on Monday, starting a week that will feature several noteworthy economic reports, including July PPI (Briefing.com consensus 0.1%; prior 0.2%) tomorrow morning and CPI (Briefing.com consensus 0.2%; prior -0.1%) on Wednesday. The trading day started in flat fashion after a quiet night in global markets that included a holiday closure in Japan. Still, there was some encouraging commentary from former Bank of Japan official Sakurai, who said that the central bank will not be able to raise rates again until at least March. Treasuries faced some modest pressure during the first hour of action, but quickly rallied off their lows as stocks struggled to maintain their modest morning gains. The bounce off lows continued in late morning trade after the market received the latest Survey of Consumer Expectations from the New York Fed, which showed that three-year inflation expectations plunged by 60 basis points to 2.3%, reaching their lowest level since the survey began in 2013. Meanwhile, year-ahead expectations remained at 3.0% while the five-year outlook stayed at 2.8%. Treasuries reached their best levels just ahead of 14:00 ET, settling near their best levels of the day. Crude oil extended last week's bounce off its lowest level since early February while the U.S. Dollar Index was little changed at 103.14.
• Yield Check:
  • 2-yr: -3 bps to 4.02%
  • 3-yr: -5 bps to 3.83%
  • 5-yr: -5 bps to 3.75%
  • 10-yr: -3 bps to 3.91%
  • 30-yr: -3 bps to 4.20%

• News:
  • The U.S., U.K., France, Germany, and Italy issued a joint statement calling for a de-escalation of tensions in the Middle East.
  • South Korea's exports through the first ten days of August were up 16.7% yr/yr with chip exports jumping 42.1%.
  • Bank of England policymaker Mann said that wage growth in the U.K. remains concerning even though overall inflation is near the central bank's target.
  • Fitch affirmed the Netherlands' AAA rating with a Stable outlook and affirmed Finland's AA+ rating with a Negative outlook, down from Stable.
  • Germany's July WPI was up 0.3% m/m (expected 0.2%; last -0.3%) but down 0.1% yr/yr (last -0.6%).
• Today's Data:
  • The U.S. Treasury reported a $243.7 bln deficit for July. The Treasury Budget data is not seasonally adjusted so the July deficit cannot be compared to the revised $70.9 bln deficit (from -$66.0 bln) for June.
    • The key takeaway from the report is that the U.S. government continues to run large budget deficits, driven in part by net interest costs that are outweighing defense spending.
• Commodities:
  • WTI crude: +4.1% to $79.91/bbl
  • Gold: +1.3% to $2504.90/ozt
  • Copper: +1.8% to $4.07/lb
• Currencies:
  • EUR/USD: +0.1% to 1.0931
  • GBP/USD: +0.1% to 1.2769
  • USD/CNH: +0.1% to 7.1786
  • USD/JPY: +0.5% to 147.30
• The Day Ahead:
  • 6:00 ET: July NFIB Small Business Optimism (prior 91.5)
  • 8:30 ET: July PPI (Briefing.com consensus 0.1%; prior 0.2%) and Core PPI (Briefing.com consensus 0.2%; prior 0.4%)