Bond Market Update

Short End Narrows Recent Outperformance Gap

• U.S. Treasuries faced some pressure on Thursday with shorter tenors reversing some of their recent outperformance while the long bond eked out a slim gain after showing relative weakness since the FOMC announced a rate cut last week. The trading day started with slim gains after another night of stimulus news from China. To that end, the Politburo's latest meeting produced a pledge to spend enough to ensure that China's economy will reach its growth targets for the year. The announcement gave a boost to Chinese equities and the overall sentiment was also boosted by a strong quarterly report and guidance from Micron (MU). Treasuries followed their higher start with an immediate reversal, which followed today's first batch of data that was consistent with the soft-landing view. That batch included an unrevised reading of Q2 GDP (3.0%), a decrease in weekly jobless claims (to 218,000 from 222,000) and no growth in Durable Orders for August (0.0%; Briefing.com consensus -2.9%) against expectations for a decrease. Treasuries attempted a bounce after the data-driven retreat had the 30-yr yield within a basis point of its 50-day moving average (4.170%), but the complex found resistance before returning to opening highs. The rest of the morning saw a slip to fresh lows, but the losses were trimmed after the U.S. Treasury completed this week's strong auction slate with a stellar $44 bln 7-yr note sale. Crude oil fell toward its September low (65.27) while the U.S. Dollar Index fell 0.4% to 100.52.
• Yield Check:
  • 2-yr: +7 bps to 3.62%
  • 3-yr: +5 bps to 3.54%
  • 5-yr: +4 bps to 3.56%
  • 10-yr: +1 bp to 3.79%
  • 30-yr: -1 bp to 4.12%

• News:
  • Fed Chairman Powell spoke at a U.S. Treasury conference today, but he did not comment on monetary policy.
  • The Swiss National Bank lowered its policy rate by 25 bps to 1.00% with more cuts likely to follow.
  • Several European Central Bank officials are reportedly pushing for another rate cut in October while others would prefer to wait until December.
  • The French government will reportedly ask the EU to grant a two-year extension for achieving the 3.0% deficit/GDP target.
  • China plans to inject nearly $150 bln of capital into its largest banks.
  • Australia's treasurer will travel to China for the first time in seven years.
  • Japan's LDP leadership election will be held tomorrow. 
  • Hong Kong's August trade deficit reached $33.1 bln (last deficit of $21.8 bln) as imports grew 7.9% m/m (last 9.9%) and exports rose 6.4% (last 13.1%).
  • Singapore's August Industrial Production rose 6.7% m/m (expected -4.0%; last 10.2%), jumping 21.0% yr/yr (expected 9.6%; last 2.0%).
  • Eurozone's August M3 Money Supply was up 2.9% yr/yr (expected 2.5%; last 2.3%). August Private Sector Loans rose 0.6% yr/yr, as expected (last 0.5%) and Loans to Nonfinancials rose 0.8% (last 0.6%).
  • Germany's October GfK Consumer Climate improved to -21.2 from -21.9 (expected -22.4).
  • Italy's September Business Confidence fell to 86.7 from 87.0 (expected 87.1) and Consumer Confidence rose to 98.3 from 96.1.
  • Spain's August Retail Sales were up 2.3% yr/yr (expected 1.9%; last 1.1%).
• Today's Data:
  • Initial jobless claims for the week ending September 21 decreased by 4,000 to 218,000 (Briefing.com consensus 224,000). Continuing jobless claims for the week ending September 14 increased by 13,000 to1.834 million.
    • The key takeaway from the report is the continuing low level of initial jobless claims -- a leading indicator -- that isn't leading the market to think a recession is imminent.
  • The third estimate for Q2 GDP remained at 3.0% (Briefing.com consensus 3.0%). Similarly, the third estimate for the Q2 GDP Deflator remained at 2.5% (Briefing.com consensus 2.5%).
    • The key takeaway from this backward-looking report (we're just days away from the end of the third quarter) is that personal spending (+2.8%) was nowhere near a recession glide path, having exceeded the prior eight quarter average of 2.2%.
  • Durable goods orders were flat month-over-month in August (Briefing.com consensus -2.9%) following an unrevised 9.9% increase in July. Excluding transportation, durable goods orders were up 0.5% month-over-month (Briefing.com consensus 0.1%) following an upwardly revised 0.1% decline (from -0.2%) in July.
    • The key takeaway from the report is that new orders for nondefense capital goods excluding aircraft -- a proxy for business spending -- increased 0.2% month-over-month, bouncing back from a 0.2% decline in July.
  • Pending Home Sales rose 0.6% in August (Briefing.com consensus 1.0%) after falling 5.5% in July.
  • Weekly natural gas inventories increased by 47 bcf after increasing by 58 bcf a week ago.
  • $44 bln 7-year Treasury note auction results (prior 12-auction average):
    • High yield: 3.668% (4.336%).
    • Bid-to-cover: 2.36 (2.54).
    • Indirect bid: 70.8% (68.6%).
    • Direct bid: 20.3% (17.2%).
• Commodities:
  • WTI crude: -3.0% to $67.68/bbl
  • Gold: +0.3% to $2694.40/ozt
  • Copper: +3.6% to $4.65/lb
• Currencies:
  • EUR/USD: +0.5% to 1.1182
  • GBP/USD: +0.8% to 1.3422
  • USD/CNH: -0.8% to 6.9718
  • USD/JPY: -0.1% to 144.51
• The Day Ahead:
  • 8:30 ET: August Personal Income (Briefing.com consensus 0.4%; prior 0.3%), Personal Spending (Briefing.com consensus 0.3%; prior 0.5%), PCE Prices (Briefing.com consensus 0.1%; prior 0.2%), Core PCE Prices (Briefing.com consensus 0.2%; prior 0.2%), August advance goods trade balance (prior -$102.7 bln), August advance Retail Inventories (prior 0.8%), and August advance Wholesale Inventories (prior 0.3%)
  • 10:00 ET: Final September University of Michigan Consumer Sentiment (Briefing.com consensus 69.0; prior 69.0)