Bond Market Update

Rate Cut Bets Soar

• U.S. Treasuries finished a stellar week on a sharply higher note, as the 7-yr note and shorter tenors raced to fresh highs for the year while the 10-yr note finished within a point of its high from the start of February. Treasuries started the day with modest gains after a night that saw weakness in global equity markets and strength in sovereign debt. The modest early gains were extended significantly after the jobs report for July added to the market's newfound growth concerns, showing below-consensus nonfarm payroll growth (114,000; Briefing.com consensus 170,000), a downward revision to June's growth (to 179,000 from 206,000), and an unexpected increase in the Unemployment Rate to 4.3% from 4.1%. The post-data rally sent yields on most tenors to fresh lows for the year with the 2-yr yield sliding toward its low from 2023 (3.549%). Rate cut expectations increased significantly with the fed funds futures market now seeing a 73.5% implied likelihood of a 50-bps rate cut in September, up from 22.0% yesterday and 11.5% a week ago. JPMorgan, meanwhile, now expects that the FOMC will announce 50-basis point rate cuts in September and November, followed by a 25-basis point cut in December. The 10-yr note and shorter tenors drifted in a sideways range just below highs into the close while the long bond added to its gain as the day went on, though its yield is still five basis points away from this year's low. This week's outperformance in shorter tenors widened the 2s10s spread by eleven basis points to -8 bps. Crude oil fell toward its June low, giving up $3.46, or 4.5%, for the week, while the U.S. Dollar Index fell 1.1% to 103.24, diving through its 200-day moving average (104.29) to levels from early March. The Index lost 1.0% this week.
• Yield Check:
  • 2-yr: -29 bps to 3.87% (-52 bps this week)
  • 3-yr: -27 bps to 3.70% (-50 bps this week)
  • 5-yr: -23 bps to 3.62% (-46 bps this week)
  • 10-yr: -18 bps to 3.79% (-41 bps this week)
  • 30-yr: -16 bps to 4.11% (-35 bps this week)

• News:
  • Richmond Fed President Barkin (FOMC voter) did not speak in support of a 50-basis point cut in September in comments made to The New York Times.
  • Chicago Fed President (non-voter) Goolsbee said that the Fed should cut if inflation and the job market continue to cool.
  • Vice President Harris received enough votes in virtual roll call of DNC delegates to officially become the Democratic nominee for president.
  • Japan's Industry Minister Saito said that economic fundamentals are "not bad" while a former Bank of Japan official said that another rate hike is likely in October.
  • South Korea's vice finance minister said that inflation is expected to begin approaching target after this month.
  • A poll conducted by YouGov showed that British inflation expectations for the year ahead ticked up to 2.7% from 2.6%.
  • International Consolidated Airlines reported solid results for the quarter and resumed its dividend.
  • Japan's July Monetary Base was up 1.2% yr/yr (expected 0.9%; last 0.6%).
  • South Korea's July CPI was up 0.3% m/m, as expected (last -0.2%), rising 2.6% yr/yr (expected 2.5%; last 2.4%).
  • Australia's July Home Loans rose 0.5% m/m (expected -1.0%; last -1.9%) and Invest Housing Finance was up 2.7% m/m (last -1.3%). Q2 PPI was up 1.0% qtr/qtr, as expected (last 0.9%), rising 4.8% yr/yr (last 4.3%).
  • France's June Industrial Production was up 0.8% m/m (expected 1.0%; last -2.2%) and June government budget deficit reached EUR103.5 bln (last deficit of EUR113.5 bln).
  • Italy's June Industrial Production was down 2.6% yr/yr (last -3.3%) and June Retail Sales were down 0.2% m/m (expected 0.2%; last 0.4%), falling 1.0% yr/yr (last 0.5%).
  • Spain's July Unemployment decreased by 10,800 (expected -17,400; last -46,800).
  • Swiss July CPI was down 0.2% m/m, as expected (last 0.0%) but up 1.3% yr/yr, as expected (last 1.3%). July procure.ch PMI hit 43.5 (expected 44.4; last 43.9).
• Today's Data:
  • July nonfarm payrolls increased by 114,000 (Briefing.com consensus 170,000). The 3-month average for total nonfarm payrolls increased to 170,000 from 168,000. June nonfarm payrolls revised to 179,000 from 206,000. May nonfarm payrolls revised to 216,000 from 218,000.
    • July private sector payrolls increased by 97,000 (Briefing.com consensus 153,000). June private sector payrolls unrevised at 136,000. May private sector payrolls revised to 206,000 from 193,000.
    • July unemployment rate was 4.3% (Briefing.com consensus 4.1%), versus 4.1% in June. Persons unemployed for 27 weeks or more accounted for 21.6% of the unemployed versus 22.2% in June. The U6 unemployment rate, which accounts for unemployed and underemployed workers, increased to 7.8% from 7.4%. 
    • July average hourly earnings were up 0.2% (Briefing.com consensus 0.3%) versus 0.3% in June. Over the last 12 months, average hourly earnings have risen 3.6%, versus 3.8% for the 12 months ending in June.
    • The average workweek in July was 34.2 hours (Briefing.com consensus 34.3), versus 34.3 hours in June. Manufacturing workweek decreased by 0.2 hour to 39.9 hours. Factory overtime decreased 0.1 hour to 2.8 hours.
    • The labor force participation rate increased to 62.7% from 62.6% while the employment-population ratio dipped to 60.0% from 60.1%.
  • Factory orders declined 3.3% month-over-month in June following a 0.5% decline in May. Excluding transportation, factory orders edged 0.1% higher on the heels of a 0.7% decline in May. Shipments of manufactured goods jumped 0.5% in June after declining 0.7% in May.
    • The key takeaway from the report is that the weakness in factory orders was not as pronounced as the headline suggests, as the weakness was driven by transportation equipment orders, which are notoriously volatile.
• Commodities:
  • WTI crude: -3.5% to $73.62/bbl
  • Gold: -0.4% to $2469.80/ozt
  • Copper: +0.5% to $4.10/lb
• Currencies:
  • EUR/USD: +1.1% to 1.0909
  • GBP/USD: +0.5% to 1.2805
  • USD/CNH: -1.2% to 7.1639
  • USD/JPY: -1.8% to 146.59
• The Week Ahead:
  • Monday: Final July S&P Global U.S. Services PMI (prior 56.0) at 9:45 ET; July ISM Non-Manufacturing Index (prior 48.8%) at 10:00 ET; and Senior Loan Officer Survey at 14:00 ET
  • Tuesday: June Trade Balance (prior -$75.1 bln) at 8:30 ET and $58 bln 3-yr Treasury note auction results at 13:00 ET
  • Wednesday: Weekly MBA Mortgage Index (prior -3.9%) at 7:00 ET; weekly crude oil inventories (prior -3.44 mln) at 10:30 ET; $42 bln 10-yr Treasury note auction results at 13:00 ET; and June Consumer Credit (prior $11.3 bln) at 15:00 ET
  • Thursday: Weekly Initial Claims (prior 249,000) and Continuing Claims (prior 1.877 mln) at 8:30 ET; June Wholesale Inventories (prior 0.6%) at 10:00 ET; weekly natural gas inventories (prior +18 bcf) at 10:00 ET; and $25 bln 30-yr Treasury bond auction results at 13:00 ET
  • Friday: Nothing of note