Bond Market Update

Short End Paces Friday Rally

• U.S. Treasuries climbed on Friday, allowing the 2-yr note to finish the week on a slightly higher note while longer tenors recovered the bulk of their remaining losses from this week. The trading day started with slim gains after overnight action featured news of a new prime minister in Japan and cool inflation figures from France and Spain that boosted hopes for another rate cut from the European Central Bank. Treasuries added to their starting gains after the Personal Income/Outlays report for August showed cooler-than-expected Personal Income (0.2%; Briefing.com consensus 0.4%) and Personal Spending (0.2%; Briefing.com consensus 0.3%) growth while the core PCE Price Index (0.1%; Briefing.com consensus 0.2%) was a below expectations, though the yr/yr reading still ticked up to 2.7% from 2.6% in July. The rest of the morning saw a brief pullback in the long bond, but it found support near its early low, returning to its best level in the early afternoon. Shorter tenors, meanwhile, climbed past their morning highs in the early afternoon, staying at their best levels into the close. This week's underperformance in longer tenors expanded the 2s10s spread by three basis points to 19 bps. Crude oil avoided setting a fresh low for the month, but still lost $2.86, or 4.0%, for the week, while the U.S. Dollar Index slipped past its September low to fresh 14-month low. The index narrowed its loss to 0.1% at 100.43 by the close, surrendering 0.3% for the week.
• Yield Check:
  • 2-yr: -6 bps to 3.56% (-1 bp for the week)
  • 3-yr: -6 bps to 3.48% (+1 bp for the week)
  • 5-yr: -6 bps to 3.50% (+2 bps for the week)
  • 10-yr: -4 bps to 3.75% (+2 bps for the week)
  • 30-yr: -3 bps to 4.10% (+3 bps for the week)

• News:
  • The Atlanta Fed's GDPNow forecast for Q3 GDP was increased to 3.1% from 2.9% in the previous estimate.
  • European Central Bank policymaker Schnabel discussed softening labor market conditions and a stagnating economy, fueling speculation about the next rate cut being around the corner.
  • There was speculation that the new French government will push for renewed merger talks between Renault and Stellantis. 
  • Australia's Treasurer Chalmers said that cooperation with China on investment, trade, and decarbonization will be increased.
  • China's August Industrial Profit was up 0.5% YTD (last 3.6%).
  • Japan's September Tokyo CPI was down 0.2% m/m (last 0.5%) but up 2.2% yr/yr (last 2.6%). September Tokyo Core CPI was up 2.0%, as expected (last 2.4%). July Leading Index rose to 109.3 from 109.1 (expected 109.5) and Coincident Indicator rose 3.1% m/m (expected 3.0%; last -3.9%).
  • South Korea's August Manufacturing BSI Index fell to 69 from 71.
  • Eurozone's September Business and Consumer Survey dipped to 96.2 from 96.5 (expected 96.5).
  • Germany's September unemployment increased by 17,000 (expected 13,000; last 4,000) while the Unemployment Rate remained at 6.0%, as expected.
  • U.K.'s September CBI Distributive Trades Survey rose to 4 from -27 (expected -17). 
  • France's flash September CPI was down 1.2% m/m (expected -0.7%; last 0.5%) but up 1.2% yr/yr (expected 1.6%; last 1.8%). August PPI was up 0.2% m/m (last 0.3%) but down 6.3% yr/yr (last -5.7%). August Consumer Spending was up 0.2% m/m (expected -0.1%; last 0.2%).
  • Italy's July Industrial Sales were down 0.4% m/m (last -0.4%), falling 4.7% yr/yr (last -4.4%). August PPI was up 0.7% m/m (last 1.3%) but down 0.8% yr/yr (last -1.1%).
  • Spain's September CPI was down 0.6% m/m (expected -0.1%; last 0.0%) but up 1.5% yr/yr (expected 1.9%; last 2.3%). September Core CPI was up 2.4% yr/yr (last 2.7%). September Business Confidence improved to -0.7 from -3.6. Q2 GDP expanded 0.8% qtr/qtr, as expected (last 0.8%), growing 3.1% yr/yr (expected 2.9%; last 2.9%).
• Today's Data:
  • Personal income increased 0.2% month-over-month in August (Briefing.com consensus 0.4%) and personal spending increased 0.2% (Briefing.com consensus 0.3%). The PCE Price Index rose 0.1% month-over-month (Briefing.com consensus 0.1%) and the core-PCE Price Index, which excludes food and energy, increased 0.1% (Briefing.com consensus 0.2%). On a year-over-year basis, the PCE Price Index was up 2.2%, versus 2.5% in July, while the core-PCE Price index was up 2.7%, versus 2.6% in July.
    • The key takeaway from the report is that it shows tame inflation figures that support the Fed's progress in getting inflation back to its 2% target on a sustainable basis.
  • The advance goods trade deficit reached $94.3 bln in August after a $103.8 bln deficit in July.
  • Advance Wholesale Inventories increased by 0.2% in August after increasing by 0.3% in July.
  • Advance Retail Inventories increased by 0.5% in August after increasing by 0.8% in July.
  • The final reading for the September University of Michigan Index of Consumer Sentiment reached 70.1 (Briefing.com consensus 69.0) versus the preliminary reading of 69.0. The final reading for August was 67.9. In the same period a year ago, the index stood at 67.8.
    • The key takeaway from the report is that consumer sentiment picked up in September, and has been picking up as inflation pressures have moderated.
• Commodities:
  • WTI crude: +0.7% to $68.15/bbl
  • Gold: -1.0% to $2667.90/ozt
  • Copper: -1.8% to $4.58/lb
• Currencies:
  • EUR/USD: -0.1% to 1.1164
  • GBP/USD: -0.2% to 1.3381
  • USD/CNH: +0.2% to 6.9809
  • USD/JPY: -1.8% to 142.22
• The Week Ahead:
  • Monday: September Chicago PMI (prior 46.1) at 9:45 ET
  • Tuesday: Final September S&P Global U.S. Manufacturing PMI (prior 47.9) at 9:45 ET; September ISM Manufacturing Index (prior 47.2%), August job openings (prior 7.673 mln), and August Construction Spending (prior -0.3%) at 10:00 ET
  • Wednesday: Weekly MBA Mortgage Index (prior 11.0%) at 7:00 ET; September ADP Employment Change (prior 99,000) at 8:15 ET; and weekly crude oil inventories (prior -4.47 mln) at 10:30 ET
  • Thursday: Weekly Initial Claims (prior 218,000) and Continuing Claims (prior 1.834 mln) at 8:30 ET; final September S&P Global U.S. Services PMI (prior 55.7) at 9:45 ET; August Factory Orders (prior 5.0%) and September ISM Non-Manufacturing Index (prior 51.5%) at 10:00 ET; and weekly natural gas inventories (prior +47 bcf) at 10:30 ET
  • Friday: September Nonfarm Payrolls (prior 142,000), Nonfarm Private Payrolls (prior 118,000), Average Hourly Earnings (prior 0.4%), Unemployment Rate (prior 4.2%), and Average Workweek (prior 34.3) at 8:30 ET