Bond Market Update

Solid Data Send Treasuries to Monday Lows

• U.S. Treasuries retreated on Thursday, falling from their best levels of the week toward lows from Monday morning. The trading day started with slim losses in longer tenors after a night that included few noteworthy economic reports like Japan's above-consensus flash Q2 GDP (0.8%; expected 0.6%), better-than-expected July employment growth in Australia (58,200; expected 20,200), and in-line flash Q2 growth in the U.K. (0.6%). The 10-yr note and the long bond lagged in early action, but the 2-yr note led the complex lower after today's first batch of data featured much stronger than expected Retail Sales for July (1.0%; Briefing.com consensus 0.3%) and another decrease in weekly jobless claims. The market received another positive growth signal from today's batch of earnings report, which included strong results from retail giant Walmart (WMT) and machinery manufacturer Deere (DE). The post-data selling sent the 10-yr note and shorter tenors to their lows from Monday while the long bond stopped a bit above that level. The market spent the rest of the session in a sideways range with shorter tenors remaining closer to their lows than the long bond. Crude oil recovered the bulk of yesterday's loss while the U.S. Dollar Index climbed 0.4% to 102.97.
• Yield Check:
  • 2-yr: +15 bps to 4.10%
  • 3-yr: +15 bps to 3.91%
  • 5-yr: +13 bps to 3.80%
  • 10-yr: +11 bps to 3.93%
  • 30-yr: +7 bps to 4.18%

• News:
  • The Atlanta Fed's GDPNow forecast for Q3 GDP was lowered to 2.4% from 2.9% in the previous estimate.
  • Norges Bank kept its policy rate at 4.50% and released a somewhat dovish Statement.
  • China Securities Journal warned about "additional volatility" in the bond market as the government tries to discourage strong demand for fixed income.
  • China Baowu Steel Group warned that the Chinese steel industry is facing a bigger crisis than what was seen in 2008 and 2015.
  • Thailand's prime minister was dismissed after being found guilty of an ethics violation.
  • China's July Industrial Production was up 5.1% yr/yr (expected 5.2%; last 5.3%), July Retail Sales grew 2.7% yr/yr (expected 2.6%; last 2.0%), July Fixed Asset Investment increased 3.6% yr/yr (expected 3.9%; last 3.9%), and July Unemployment Rate rose to 5.2% from 5.0% (expected 5.1%). July House Prices were down 4.9% yr/yr (last -4.5%).
  • Japan's flash Q2 GDP expanded 0.8% qtr/qtr (expected 0.6%; last -0.6%), growing 3.1% yr/yr (expected 2.1%; last -2.3%). Q2 GDP Price Index was up 3.0% (expected 2.6%; last 3.4%). June Industrial Production was down 4.2% m/m (expected -3.6%; last 3.6%) and Capacity Utilization was down 3.1% m/m (last 4.1%). 
  • Australia's July Employment increased by 58.200 (expected 20,200; last 52,300) and full employment increased by 60,500 (last 45,200). July Unemployment Rate rose to 4.2% from 4.1% (expected 4.1%) and Participation Rate rose to 67.1% from 66.9% (expected 66.9%).
  • New Zealand's July Electronic Card Retail Sales were down 0.1% m/m (last -0.7%), falling 4.9% yr/yr (last -4.9%). July FPI was up 0.4% m/m (last 1.0%).
  • U.K.'s flash Q2 GDP grew 0.6% qtr/qtr, as expected (last 0.7%), expanding 0.9% yr/yr, as expected (last 0.3%). Q2 Labor Productivity increased by 0.1% qtr/qr (expected -0.3%; last -0.2%).
  • Swiss July PPI was unchanged m/m (expected 0.2%; last 0.0%), falling 1.7% yr/yr, as expected (last -1.9%).
• Today's Data:
  • Total retail sales were up 1.0% month-over-month in July (Briefing.com consensus 0.3%) following a downwardly revised 0.2% decline (from 0.0%) in June. Excluding autos, retail sales rose 0.4% following an upwardly revised 0.5% increase (from 0.4%) in June.
    • The key takeaway from the report is that the increase in retail sales outpaced the rate of inflation in July, which connotes an understanding that the improvement in retail sales was driven by increased demand on top of price increases.
  • Initial jobless claims for the week ending August 10 decreased by 7,000 to 227,000. Recall that initial jobless claims hit 250,000 just a few weeks ago. Continuing jobless claims for the week ending August 3 decreased by 7,000 to 1.864 million.
    • The key takeaway from the report is that initial claims remain well below levels typically associated with recession conditions.
  • Import prices were up 0.1% month-over-month in July. Excluding fuel, they were also up 0.1%. Export prices increased 0.7% month-over-month. Excluding agricultural products, export prices were up 1.0%.
    • The key takeaway from this report is that import and export prices were well behaved on a year-over-year basis. Import prices were up 1.6% (+1.2% excluding fuel) and export prices were up 1.4% (+2.3% excluding agricultural products).
  • Total industrial production decreased 0.6% month-over-month in July (Briefing.com consensus 0.1%) following a downwardly revised 0.3% increase (from 0.6%) in June. The capacity utilization rate fell to 77.8% (Briefing.com consensus 78.6%) from a downwardly revised 78.4% (from 78.8%) in June. Total industrial production was down 0.2% yr/yr while the capacity utilization rate was 1.9 percentage point below its long-run average.
    • The key takeaway from the report is the understanding that it was depressed by Hurricane Beryl, which reduced industrial production by an estimated 0.3 percentage point and manufacturing output by an estimated 0.3 percent. Industrial production wasn't strong in July, but taking the effects of the hurricane into account, it wasn't as weak as it seems either.
  • The Philadelphia Fed survey fell to -7.0 in August from 13.9 in July.
  • The Empire State Manufacturing survey rose to -4.7 in August from -6.6 in July.
  • Business Inventories were up 0.3% in June (Briefing.com consensus 0.2%) after increasing 0.5% in May. 
  • The NAHB Housing Market Index fell to 39 in August (Briefing.com consensus 43) from 41 in July.
  • Weekly natural gas inventories decreased by 6 bcf after increasing by 21 bcf a week ago.
• Commodities: 
  • WTI crude: +1.5% to $78.22/bbl
  • Gold: +0.6% to $2492.50/ozt 
  • Copper: +2.7% to $4.15/lb
• Currencies:
  • EUR/USD: -0.3% to 1.0978
  • GBP/USD: +0.3% to 1.2861
  • USD/CNH: +0.5% to 7.1818
  • USD/JPY: +1.2% to 149.01
• The Day Ahead:
  • 8:30 ET: July Housing Starts (Briefing.com consensus 1.350 mln; prior 1.353 mln) and Building Permits (Briefing.com consensus 1.440 mln; prior 1.446 mln)
  • 10:00 ET: and preliminary August University of Michigan Consumer Sentiment (Briefing.com consensus 66.7; prior 66.4)