Bond Market Update

Decreasing Rate Cut Expectations Weigh as Q3 Ends

• U.S. Treasuries ended September and Q3 on a lower note, finishing at their worst levels of the day after Fed Chairman Powell dashed hopes for a 50-basis point rate cut in November. Treasuries started the day in negative territory with the short end leading early weakness after a busy start to the week in global markets. China's Shanghai Composite (+8.1%) extended its recent stimulus-driven rally to nearly 25.0% while Japan's Nikkei (-4.8%) staged a sharp reversal from a two-month high as the market expressed some concern about the new prime minister who favors the Bank of Japan's tightening campaign. The lower start was followed by an immediate rebound that was paced by longer tenors and briefly lifted the long bond into positive territory in mid-morning trade, but the rest of the session saw renewed pressure. The 10-yr note and shorter tenors slid past their morning lows during the final hour of trade after Fed Chairman Powell, who told the National Association for Business Economics that the FOMC is on track to make two more rate cuts if the economy evolves as expected. The remarks caused an immediate repricing of rate cut expectations with the fed funds futures market now projecting just a 33.2% implied likelihood of a 50-bps rate cut, down from 53.3% on Friday. Crude oil ended the day little changed, giving up over $5.00/bbl for the month and more than $13.00/bbl for the quarter, while the U.S. Dollar Index rose 0.4% to 100.78, narrowing its September loss to 0.9% and its Q3 loss to 4.8%.
• Yield Check:
  • 2-yr: +9 bps to 3.65% (-28 bps in September; -107 bps in Q3)
  • 3-yr: +9 bps to 3.57% (-22 bps in September; -94 bps in Q3)
  • 5-yr: +7 bps to 3.58% (-14 bps in September; -75 bps in Q3)
  • 10-yr: +5 bps to 3.80% (-11 bps in September; -54 bps in Q3)
  • 30-yr: +4 bps to 4.13% (-7 bps in September; -37 bps in Q3)

• News:
  • The French government may impose a temporary extra tax on companies that generate more than EUR1 bln in revenue.
  • The People's Bank of China instructed commercial banks to start lowering mortgage rates in batches and cut the standing lending facility rates for maturities up to one-month by 20 basis points. 
  • China's September Manufacturing PMI hit 49.8 (expected 49.4; last 49.1) and Non-Manufacturing PMI hit 50.0 (expected 50.4; last 50.3). September Caixin Manufacturing PMI hit 49.3 (expected 50.5; last 50.4) and Caixin Services PMI hit 50.3 (expected 51.6; last 51.6).
  • Japan's August Industrial Production was down 3.3% m/m (expected -0.5%; last 3.1%) and August Retail Sales rose 2.8% yr/yr (expected 2.6%; last 2.7%). August Housing Starts were down 5.1% yr/yr (expected -3.3%; last -0.2%) and Construction Orders were up 8.7% yr/yr (last 62.8%).
  • South Korea's August Industrial Production rose 4.1% m/m (last -3.9%), increasing 3.8% yr/yr (last 5.2%). August Retail Sales were up 1.7% m/m (last -2.0%) and Service Sector Output was up 0.2% m/m (last 0.3%).
  • Australia's August Private Sector Credit was up 0.5% m/m, as expected (last 0.5%).
  • New Zealand's September ANZ Business Confidence hit 60.9 (last 50.6).
  • Germany's August Import Price Index was down 0.4% m/m, as expected (last -0.4%) but up 0.2% yr/yr (last 0.9%). Flash September CPI was unchanged m/m (expected 0.1%: prior -0.1%), rising 1.6% yr/yr (expected 1.7%; last 1.9%).
  • U.K.'s Q2 GDP expanded 0.5% qtr/qtr (expected 0.6%; last 0.7%), growing 0.7% yr/yr (expected 0.9%; last 0.3%). Q2 Current Account deficit reached GBP28.4 bln (expected -GBP32.5 bln; last -GBP13.8 bln). Q2 Business Investment was up 1.4% qtr/qtr (expected -0.1%; last 0.6%), rising 0.2% yr/yr (expected -1.1%; last -1.8%). September Nationwide HPI was up 0.7% m/m (expected 0.3%; last -0.2%), rising 3.2% yr/yr (last 2.4%). August Consumer Credit reached GBP1.295 bln (last GBP1.231 bln) and August Mortgage Approvals reached 64,860 (expected 64,000; last 62,500).
  • Italy's August non-EU trade surplus reached EUR2.69 bln (last surplus of EUR6.04 bln). September CPI was down 0.2% m/m, as expected (last 0.2%) but up 0.7% yr/yr (expected 0.8%; last 1.1%).
  • Spain's July Current Account surplus reached EUR5.79 bln (last surplus of EUR5.02 bln).
  • Swiss September KOF Leading Indicators rose to 105.5 from 105.0 (expected 101.0).
• Today's Data:
  • The Chicago PMI hit 46.6 in September (Briefing.com consensus 46.2), up from 46.1 in August.
• Commodities:
  • WTI crude: UNCH at $68.13/bbl
  • Gold: -0.3% to $2658.80/ozt
  • Copper: -0.7% to $4.55/lb
• Currencies:
  • EUR/USD: -0.3% to 1.1126 
  • GBP/USD: -0.1% to 1.3363
  • USD/CNH: +0.4% to 7.0081
  • USD/JPY: +1.1% to 143.77
• The Day Ahead:
  • 9:45 ET: Final September S&P Global U.S. Manufacturing PMI (prior 47.9)
  • 10:00 ET: September ISM Manufacturing Index (Briefing.com consensus 47.7%; prior 47.2%), August job openings (prior 7.673 mln), and August Construction Spending (Briefing.com consensus 0.1%; prior -0.3%)