Bond Market Update

Treasuries Dip From 2024 Highs

• U.S. Treasuries retreated ahead of tomorrow's release of the September FOMC Statement, but not before yields on 10s and 30s tagged fresh lows for the year, which has been dominated by speculation surrounding the number of rate cuts that will be made before 2025. The long bond and the 10-yr note displayed relative strength at the start after another night of reduced volume in Asia due to holidays in China and South Korea. China's market will reopen tomorrow, but Hong Kong will be closed, and South Korea will remain closed for one more day. Not surprisingly, the overnight news flow was limited, but it is worth nothing that the U.S. and Japan are nearing on an agreement to restrict technology exports to China. Treasuries added to their opening gains during the first few minutes of action, reversing from highs after the Retail Sales report for August (0.1%; Briefing.com consensus -0.2%), surprised to the upside, showing slight growth against expectations for a slight contraction in activity. Treasuries deepened their pullback after the Industrial Production report for August (0.8%; Briefing.com consensus 0.1%) also exceeded estimates, but the market found support shortly after dipping into the red. The long bond and the 10-yr note reached their lowest levels of the day after the U.S. Treasury sold $13 bln in 20-yr bonds to weak demand while shorter tenors spent the early afternoon in a slow rise off their late-morning lows. Going into tomorrow, the fed funds futures market sees a 63.0% implied likelihood of a 50-bps rate cut, up from 34.0% a week ago. Crude oil extended its rebound off a fresh 2024 low even as the U.S. Dollar Index rose 0.2% to 100.92.
• Yield Check:
  • 2-yr: +3 bps to 3.59%
  • 3-yr: +3 bps to 3.45%
  • 5-yr: +3 bps to 3.43%
  • 10-yr: +2 bps to 3.64%
  • 30-yr: +2 bps to 3.95%

• News:
  • The Atlanta Fed's GDPNow forecast for Q3 GDP was increased to 3.0% from 2.5% in the previous estimate.
  • British home improvement retailer Kingfisher reported strong results for the first half and raised its guidance for the remainder of the year.
  • There was growing speculation that the Bank of Japan will hold off on its next rate change to study the impact of hikes that have been made so far.
  • Tokyo Steel lowered the prices of some of its products for the first time in two years.
  • Japan's July Tertiary Industry Activity Index was up 1.4% m/m (expected 0.8%; last -1.2%).
  • India's August WPI Inflation was up 1.31% yr/yr (expected 1.80%; last 2.04%). August trade deficit reached $29.65 bln (last deficit of $23.50 bln).
  • Singapore's August trade surplus reached SGD5.90 bln (expected surplus of SGD3.83 bln; last surplus of SGD6.54 bln) as non-oil exports fell 4.7% m/m (expected -3.3%; last 12.2%) but were up 10.7% yr/yr (expected 15.0%; last 15.7%). Q2 Unemployment Rate remained at 2.0%, as expected.
  • Eurozone's September ZEW Economic Sentiment fell to 9.3 from 17.9 (expected 16.3).
  • Germany's September ZEW Economic Sentiment fell to 3.6 from 19.2 (expected 17.1) and Current Conditions fell to -84.5 from -77.3 (expected -80.0).
• Today's Data:
  • Total retail sales increased 0.1% month-over-month in August (Briefing.com consensus -0.2%) following an upwardly revised 1.1% (from 1.0%) in July. Excluding autos, retail sales were also up 0.1% (Briefing.com consensus 0.2%) following an unrevised 0.4% increase in July.
    • The key takeaway from the report is that control group sales -- the component that factors into GDP -- were up a sturdy 0.3% following an upwardly revised 0.4% increase (from 0.3%) in July and 0.9% increase in June. There is no hard landing in those numbers.
  • Total industrial production increased 0.8% month-over-month in August (Briefing.com consensus 0.1%) following a downwardly revised 0.9% decline (from -0.6%) in July. The capacity utilization rate increased to 78.0% (Briefing.com consensus 77.9%) from a downwardly revised 77.4% (from 77.8%) in July. Total industrial production was flat yr/yr while the capacity utilization rate was 1.7 percentage points below its long-run average.
    • The key takeaway from the report is that industrial production snapped back in August, led by manufacturing output and a near 10% increase in the index of motor vehicles and parts, after being depressed by Hurricane Beryl in July.
  • Business Inventories were up 0.4% in July (Briefing.com consensus 0.4%) after increasing 0.3% in June.
  • The NAHB Housing Market Index rose to 41 in September (Briefing.com consensus 41) from 39 in August.
  • $13 bln 20-year Treasury bond auction results (prior 12-auction average):
    • High yield: 4.039% (4.577%).
    • Bid-to-cover: 2.51 (2.62).
    • Indirect bid: 65.1% (70.4%).
    • Direct bid: 16.3% (18.4%).
• Commodities:
  • WTI crude: +1.5% to $71.27/bbl
  • Gold: -0.6% to $2592.10/ozt
  • Copper: UNCH at $4.27/lb
• Currencies:
  • EUR/USD: -0.1% to 1.1120
  • GBP/USD: -0.4% to 1.3164
  • USD/CNH: +0.2% to 7.1093
  • USD/JPY: +0.9% to 141.83
• The Day Ahead:
  • 7:00 ET: Weekly MBA Mortgage Index (prior 1.4%)
  • 8:30 ET: August Housing Starts (Briefing.com consensus 1.320 mln; prior 1.238 mln) and Building Permits (Briefing.com consensus 1.415 mln; prior 1.396 mln)
  • 10:30 ET: Weekly crude oil inventories (prior 0.883 mln)
  • 14:00 ET: September FOMC Rate Decision (Briefing.com consensus 5.00-5.25%; prior 5.25-5.50%)
  • 16:00 ET: July Net Long-Term TIC Flows (prior $96.1 bln)