Bond Market Update

August Gains Narrowed

• U.S. Treasuries ended Friday with losses across the curve, though even with today's selling, the market finished August on a firmly higher note. This was the fourth consecutive month of gains in Treasuries as the market prepares for a rate cut at the September FOMC meeting. Today's session started with relative weakness in the 2-yr note after the night brought a full dose of economic data from Asia and Europe. Japan's Tokyo Core CPI accelerated to 2.4% yr/yr, its fastest pace of growth since March, while July Retail Sales (2.6%; expected 2.8%) and Industrial Production (2.8%; expected 3.6%) growth disappointed. In Europe, eurozone's flash CPI for August decelerated to 2.2% yr/yr from 2.6% while Core CPI eased to 2.8% yr/yr from 2.9%, and the Unemployment Rate returned to this year's low (6.4%). France saw no payroll growth in the second quarter while Spain's Retail Sales beat July expectations (1.0%; expected 0.3%). Treasuries retreated after this morning's domestic data flow showed larger than expected Personal Income growth (0.3%; Briefing.com consensus 0.2%) and slightly hotter than expected Core PCE Price Index growth (0.2%; Briefing.com consensus 0.1%), which kept the yr/yr growth rate at 2.6%, unchanged from June. The post-data slide was met with a quick bounce that had Treasuries back to little changed just 90 minutes after the cash start, but the market faced renewed selling in the late morning with longer tenors sliding past their early lows while the 2-yr note stayed above its morning low. This week's underperformance in longer tenors expanded the 2s10s spread by eight basis points to -2 bps. Crude oil gave back yesterday's gain, ending the month with a loss of $4.41, or 5.7%, amid reports of a likely output increase from OPEC+, while the U.S. Dollar Index rose 0.4% to 101.70, gaining 1.0% for the week, which trimmed its August loss to 2.2%.
• Yield Check:
  • 2-yr: +4 bps to 3.93% (+2 bps this week; -41 bps in August)
  • 3-yr: +3 bps to 3.79% (+6 bps this week; -35 bps in August)
  • 5-yr: +5 bps to 3.72% (+7 bps this week; -28 bps in August)
  • 10-yr: +4 bps to 3.91% (+10 bps this week; -20 bps in August)
  • 30-yr: +5 bps to 4.20% (+10 bps this week; -17 bps in August)

• News:
  • The Atlanta Fed's GDPNow forecast for Q3 GDP was increased to 2.5% from 2.0% in the previous estimate.
  • OPEC+ will likely continue with its planned 180,000 barrel/day output increase in October, according to Reuters.
  • Chinese property names had a strong showing amid speculation that the government is preparing to offer $5.4 trln to refinance mortgages to lower borrowing costs.
  • People's Bank of China Governor Pan said that monetary policy will remain supportive and that more policies to boost the economy will be studied
  • Germany's engineering association reported a 5.0% drop in orders for July.
  • European Central Bank policymaker Schnabel said that conditions are in place for inflation to reach target by the end of 2025 while policymakers Rehn and Kazaks spoke favorably about a potential rate cut in September. 
  • Japan's August Tokyo CPI was up 2.6% yr/yr (last 2.2%) and Tokyo Core CPI was up 2.4% yr/yr (expected 2.2%; last 2.2%). July jobs/applications ratio increased to 1.24 from 1.23 (expected 1.23) and July Unemployment Rate rose to 2.7% from 2.5% (expected 2.5%). July Industrial Production rose 2.8% m/m (expected 3.6%; last -4.2%) and July Retail Sales grew 2.6% yr/yr (expected 2.8%; last 3.8%). July Housing Starts were down 0.2% yr/yr (expected -1.1%; last -6.7%) and Construction Orders jumped 62.8% yr/yr (last -19.7%).
  • South Korea's July Industrial Production was down 3.6% m/m (expected -0.4%; last 0.7%) but up 5.5% yr/yr (expected 7.0%; last 3.8%). July Retail Sales fell 1.9% m/m (last 1.0%).
  • Hong Kong's July Retail Sales fell 11.8% yr/yr (last -9.7%).
  • Australia's July Housing Credit was up 0.5% m/m (last 0.4%) and Private Sector Credit was also up 0.5% m/m, as expected (last 0.6%). July Retail Sales were unchanged m/m (expected 0.3%; last 0.5%).
  • New Zealand's July Building Consents increased 26.2% m/m (last -17.0%).
  • Eurozone's flash August CPI was up 0.2% m/m (last 0.0%), rising 2.2% yr/yr, as expected (last 2.6%). August Core CPI was up 0.3% m/m (last -0.2%), rising 2.8% yr/yr, as expected (last 2.9%). July Unemployment Rate dipped to 6.4% from 6.5% (expected 6.5%).
  • Germany's July Import Price Index was down 0.4% m/m (expected 0.1%; last 0.4%) but up 0.9% yr/yr (expected 1.5%; last 0.7%). August Unemployment increased by 2,000 (expected 17,000; last 17,000) while the Unemployment Rate remained at 6.0%, as expected.
  • U.K.'s August Nationwide HPI was down 0.2% m/m (expected 0.2%; last 0.3%) but up 2.4% yr/yr (expected 2.9%; last 2.1%). July BoE Consumer Credit reached GBP1.215 bln (expected GBP1.300 bln; last GBP869 mln), July Mortgage Lending reached GBP2.79 bln (expected GBP2.45 bln; last GBP2.63 bln), and July Net Lending to Individuals reached GBP4.001 bln (expected GBP3.400 bln; last GBP3.494 bln).
  • France's Q2 nonfarm payrolls were unchanged qtr/qtr, as expected (last 0.0%). Q2 GDP grew 0.2% qtr/qtr (expected 0.3%; last 0.2%), rising 1.0% yr/yr (expected 1.1%; last 1.1%). July Consumer Spending was up 0.3% m/m (expected 0.4%; last -0.6%) and July PPI was up 0.2% m/m (last -0.2%) but down 5.4% yr/yr (last -5.9%). Flash August CPI was up 0.6% m/m (expected 0.5%; last 0.2%), rising 1.9% yr/yr (expected 1.8%; last 2.3%).
  • Italy's July Unemployment Rate fell to 6.5% from 6.9% (expected 7.0%). Flash August CPI was up 0.2% m/m (expected 0.3%; last 0.4%), rising 1.1% yr/yr (expected 1.2%; last 1.3%). August Business Confidence hit 87.1 (expected 87.5; last 87.6) and Consumer Confidence hit 96.1 (expected 99.2; last 98.9).
  • Spain's July Retail Sales were up 1.0% yr/yr (expected 0.3%; last 0.4%). June Current Account surplus reached EUR5.02 bln (last surplus of EUR5.56 bln).
  • Swiss August KOF Leading Indicators rose to 101.6 from 100.6 (expected 100.6).
• Today's Data:
  • Personal income was up 0.3% month-over-month in July (Briefing.com consensus 0.2%) following an unrevised 0.2% increase in June. Personal spending jumped a healthy 0.5% (Briefing.com consensus 0.5%) following a 0.3% increase in June. The PCE Price Index was up 0.2% (Briefing.com consensus 0.2%), leaving it up 2.5% year-over-year, unchanged from June. The core-PCE Price Index was up 0.2% (Briefing.com consensus 0.2%), leaving it up 2.6% year-over-year, unchanged from June.
    • The key takeaway from this report is the recognition that it meshes nicely with the market's prevailing view that the U.S. economy will be able to avoid a hard landing and that the Fed will cut its policy rate because inflation is moving back toward the 2% goal.
  • The final reading for the August University of Michigan Index of Consumer Sentiment crossed at 67.9 (Briefing.com consensus 67.8) versus the preliminary reading of 67.8.
    • The key takeaway from the report is that consumers' short-run and long-run economic outlook improved.
• Commodities:
  • WTI crude: -3.1% to $73.52/bbl
  • Gold: -1.3% to $2528.20/ozt
  • Copper: -0.2% to $4.22/lb
• Currencies:
  • EUR/USD: -0.3% to 1.1049
  • GBP/USD: -0.3% to 1.3120
  • USD/CNH: -0.1% to 7.0877
  • USD/JPY: +0.8% to 146.13
• The Week Ahead:
  • Monday: Bond and equity markets closed for Labor Day
  • Tuesday: Final August S&P Global U.S. Manufacturing PMI (prior 49.6) at 9:45 ET; July Construction Spending (Briefing.com consensus 0.2%; prior -0.3%) and August ISM Manufacturing (Briefing.com consensus 47.5%; prior 46.8%) at 10:00 ET
  • Wednesday: Weekly MBA Mortgage Index (prior 0.5%) at 7:00 ET; July Trade Balance (Briefing.com consensus -$78.5 bln; prior -$73.1 bln) at 8:30 ET; July Factory Orders (Briefing.com consensus 4.5%; prior -3.3%) and July job openings (prior 8.184 mln) at 10:00 ET; and September Fed Beige Book at 14:00 ET
  • Thursday: August ADP Employment Change (Briefing.com consensus 150,000; prior 122,000) at 8:15 ET; weekly Initial Claims (Briefing.com consensus 236,000; prior 231,000), Continuing Claims (prior 1.868 mln), revised Q2 Productivity (Briefing.com consensus 2.3%; prior 2.3%), and revised Q2 Unit Labor Costs (Briefing.com consensus 0.9%; prior 0.9%) at 8:30 ET; final August S&P Global U.S. Services PMI (prior 55.0) at 9:45 ET; August ISM Non-Manufacturing (Briefing.com consensus 51.0%; prior 51.4%) at 10:00 ET; weekly natural gas inventories (prior +35 bcf) at 10:30 ET; and weekly crude oil inventories (prior -0.85 mln) at 11:00 ET
  • Friday: August Nonfarm Payrolls (Briefing.com consensus 165,000; prior 114,000), Nonfarm Private Payrolls (Briefing.com consensus 142,000; prior 97,000), Average Hourly Earnings (Briefing.com consensus 0.3%; prior 0.2%), Unemployment Rate (Briefing.com consensus 4.2%; prior 4.3%), and Average Workweek (Briefing.com consensus 34.3; prior 34.2) at 8:30 ET