Bond Market Update

Short End Leads as Rate Cut Looms

• U.S. Treasuries recovered their slim post-PPI losses, finishing the week just below their best levels of the year with the September FOMC Meeting approaching in three sessions. The bulk of the Friday advance took place at the open with the 2-yr note showing early strength, which made for a continuation of yesterday's outperformance. Treasuries started the day in positive territory after the night saw ongoing strength in the Japanese yen as the currency climbed above 141/dollar, reaching its best level against the greenback since late December. The market faced some pressure during the first two hours of action, but displayed continued resilience as the day went on with all tenors finishing near their best levels of the day. The market did not have to contend with any top-tier data releases, though several noteworthy economic reports will be in focus next week, starting with August Retail Sales (prior 1.0%) and Industrial Production (prior -0.6%) on Tuesday morning. This week's outperformance in the 2-yr note expanded the 2s10s spread by a basis point to seven basis points. Gold futures continued their advance to a fresh record above $2600/ozt while crude oil could not hold an intraday gain, though it still finished slightly higher for the week. The U.S. Dollar Index fell 0.3% to 101.07, giving up 0.1% for the week.
• Yield Check:
  • 2-yr: -7 bps to 3.58% (-7 bps this week)
  • 3-yr: -5 bps to 3.43% (-10 bps this week)
  • 5-yr: -4 bps to 3.42% (-7 bps this week)
  • 10-yr: -3 bps to 3.65% (-6 bps this week)
  • 30-yr: -2 bps to 3.98% (-4 bps this week)

• News:
  • Markets in China, Japan, and South Korea will be closed on Monday with South Korea remaining closed through Wednesday while China's market will reopen on Wednesday.
  • There was ongoing speculation that roughly $5 trln worth of Chinese mortgages will be refinanced soon.
  • China will increase the retirement age for the first time since 1978.
  • South Korea plans to lift its short selling ban in March.
  • Japan's July Industrial Production was up 3.1% m/m (expected 2.8%; last -4.2%) and Capacity Utilization was up 2.5% m/m (last -3.1%).
  • South Korea's August Import Price Index rose 1.8% yr/yr (last 9.9%) and Export Price Index rose 5.7% yr/yr (last 13.0%).
  • New Zealand's August Business PMI hit 45.8 (last 44.4).
  • Eurozone's July Industrial Production was down 0.3% m/m (expected -0.6%; last -0.1%), falling 2.2% yr/yr (expected -2.7%; last -4.1%).
  • France's August CPI was up 0.5% m/m (expected 0.6%; last 0.2%), rising 1.8 yr/yr (expected 1.9%; last 2.3%).
• Today's Data:
  • Import prices decreased 0.3% in August after increasing 0.1% in July while import price excluding oil were down 0.1% after rising 0.1% in July. Export prices fell 0.7% in August after increasing a revised 0.5% (from 0.7%) in July while export prices excluding agriculture fell 0.6% after increasing a revised 0.8% (from 1.0%) in July.
  • The preliminary reading for the September University of Michigan Index of Consumer Sentiment reached 69.0 (Briefing.com consensus 68.1) versus the final reading of 67.9 for August.
    • The key takeaway from the report is that year-ahead expectations for personal finances and the economy both improved despite substantial uncertainty surrounding the election.
• Commodities:
  • WTI crude: -0.4% to $68.68/bbl 
  • Gold: +1.2% to $2611.30/ozt
  • Copper: +0.7% to $4.22/lb
• Currencies:
  • EUR/USD: UNCH at 1.1078
  • GBP/USD: UNCH at 1.3121
  • USD/CNH: -0.2% to 7.1014
  • USD/JPY: -0.6% to 140.94
• The Week Ahead:
  • Monday: September Empire State Manufacturing survey (prior -4.7) at 8:30 ET
  • Tuesday: August Retail Sales (prior 1.0%) and Retail Sales ex-auto (prior 0.4%) at 8:30 ET; August Industrial Production (prior -0.6%) and Capacity Utilization (prior 77.8%) at 9:15 ET; July Business Inventories (prior 0.3%) and September NAHB Housing Market Index (prior 39) at 10:00 ET; and $13 bln 20-yr Treasury bond reopening results at 13:00 ET
  • Wednesday: Weekly MBA Mortgage Index (prior 1.4%) at 7:00 ET; August Housing Starts (prior 1.238 mln) and Building Permits (prior 1.396 mln) at 8:30 ET; weekly crude oil inventories (prior 0.883 mln) at 10:30 ET; September FOMC Rate Decision (prior 5.25-5.50%) at 14:00 ET; and July Net Long-Term TIC Flows (prior $96.1 bln) at 16:00 ET
  • Thursday: Weekly Initial Claims (prior 230,000), Continuing Claims (prior 1.850 mln), Q2 Current Account (prior -$237.6 bln), and September Philadelphia Fed (prior -7.0) at 8:30 ET; August Existing Home Sales (prior 3.95 mln) and August Leading Indicators (prior -0.6%) at 10:00 ET; and weekly natural gas inventories (prior +40 bcf) at 10:30 ET
  • Friday: Nothing of note