Bond Market Update

Long End Climbs After In-Line CPI

• U.S. Treasuries had a mixed showing on Wednesday with longer tenors climbing while the 2-yr note dipped in response to an in-line reading of July CPI (0.2%; Briefing.com consensus 0.2%) and Core CPI (0.2%; Briefing.com consensus 0.2%), which pressured the implied likelihood of a 50-bps rate cut in September to 35.5% from 53.0% on Tuesday. Treasuries opened the day with slim gains after a night that featured news of an upcoming leadership change in Japan and an unexpected 25-basis point rate cut from the Reserve Bank of New Zealand. The market followed its higher start with an immediate reversal after the CPI report matched expectations, but issues in the belly showed resilience, returning into positive territory while the long bond held onto its gain throughout the day. The midweek advance left the 30-yr yield just eleven basis points above last week's low while the 2-yr yield settled 30 basis points above its low from August 5. Crude oil deepened its pullback from its 50-day moving average (79.15) while the U.S. Dollar Index fell toward last week's low before returning to little changed at 102.58.
• Yield Check:
  • 2-yr: +1 bp to 3.95%
  • 3-yr: UNCH at 3.76%
  • 5-yr: -2 bps to 3.67%
  • 10-yr: -3 bps to 3.82%
  • 30-yr: -6 bps to 4.11%

• News:
  • Japan's Prime Minister Kishida said that he will not run in his party's leadership election in September.
  • The Reserve Bank of New Zealand unexpectedly lowered its official cash rate by 25 bps to 5.25%, acknowledging that a 50-basis point cut was considered.
  • China conducted a special 20-yr bond auction, which priced at a record low yield.
  • Travel company TUI noted a strong start to winter bookings for all markets.
  • Japan's August Reuters Tankan Index fell to 10 from 11.
  • South Korea's July Unemployment Rate fell to 2.5% from 2.8%.
  • India's July WPI Inflation hit 2.04% yr/yr (expected 2.39%; last 3.36%) and July trade deficit reached $23.50 bln (last deficit of $20.98 bln).
  • Eurozone's flash Q2 GDP expanded 0.3% qtr/qtr, as expected (last 0.3%), growing 0.6% yr/yr, as expected (last 0.4%). Q2 Employment was up 0.2% qtr/qtr, as expected (last 0.3%) increasing 0.8% yr/yr (last 1.0%). June Industrial Production was down 0.1% m/m (expected 0.4%; last -0.9%), falling 3.9% yr/yr (expected -2.9%; last -3.3%).
  • U.K.'s July CPI was down 0.2% m/m (last 0.1%) but up 2.2% yr/yr (expected 2.3%; last 2.0%). July Core CPI was up 0.1% m/m (last 0.2%), rising 3.3% yr/yr (expected 3.4%; last 3.5%). July Input PPI was down 0.1% m/m (expected -0.3%; last -0.4%) and Output PPI was unchanged m/m (expected 0.1%; last -0.7%). July House Price Index was up 2.7% yr/yr (expected 2.6%; last 2.2%).
  • France's July CPI was up 0.2% m/m (expected 0.1%; last 0.1%), rising 2.3% yr/yr, as expected (last 2.2%).
• Today's Data:
  • Total CPI was up 0.2% month-over-month in July, as expected, and core-CPI, which excludes food and energy, was up 0.2%, also as expected. The index for shelter was up 0.4% month-over-month and accounted for nearly 90% of the increase in the all items index. On a year-over-year basis, total CPI was up 2.9%, versus 3.0% in June, and core-CPI was up 3.2%, versus 3.3% in June.
    • The key takeaway from the report is that it points to ongoing disinflation; hence, it won't change the market's belief that the Fed will cut rates by 25 basis points in September even though CPI inflation is comfortably above the Fed's 2% goal, which is oriented around PCE price inflation that is currently at 2.5%.
  • The weekly MBA Mortgage Index jumped 16.8% after rising 6.9% a week ago. The Purchase Index rose 2.8% while the Refinance Index jumped 34.5%.
  • Weekly crude oil inventories increased by 1.36 mln barrels after increasing by 3.73 mln barrels a week ago.
• Commodities:
  • WTI crude: -1.7% to $77.01/bbl
  • Gold: -1.1% to $2479.80/ozt
  • Copper: -0.3% to $4.04/lb
• Currencies:
  • EUR/USD: +0.2% to 1.1016
  • GBP/USD: -0.2% to 1.2828
  • USD/CNH: -0.1% to 7.1443
  • USD/JPY: +0.3% to 147.25
• The Day Ahead:
  • 8:30 ET: July Retail Sales (Briefing.com consensus 0.3%; prior 0.0%), Retail Sales ex-auto (Briefing.com consensus 0.2%; prior 0.4%), weekly Initial Claims (Briefing.com consensus 232,000; prior 233,000), Continuing Claims (prior 1.875 mln), July Import Prices (prior 0.0%), Import Prices ex-oil (prior 0.2%), Export Prices (prior -0.5%), Export Prices ex-agriculture (prior -0.6%), and Empire State Manufacturing Survey (prior -6.6)
  • 9:15 ET: July Industrial Production (Briefing.com consensus 0.1%; prior 0.6%) and Capacity Utilization (Briefing.com consensus 78.6%; prior 78.8%)
  • 10:00 ET: June Business Inventories (Briefing.com consensus 0.2%; prior 0.5%) and August NAHB Housing Market Index (Briefing.com consensus 43; prior 42)
  • 10:30 ET: Weekly natural gas inventories (prior +21 bcf)
  • 16:00 ET: June Net Long-Term TIC Flows (prior -$54.6 bln)