Bond Market Update

August Highs in Sight

• U.S. Treasuries continued their solid start to September with an advance that sent the 2-yr yield to its lowest level in nearly a month with the August low (3.65%) looming 12 basis points below. The 2-yr note outperformed from the start after a night that saw gains in other sovereign debt while global equity markets struggled with technology stocks at the forefront of the weakness. The night also brought final August Services PMI readings from major economies with China's Caixin Services PMI showing a larger than expected deceleration in the pace of growth (51.6; expected 51.9) while Japan's Services PMI also showed below-consensus growth (53.7; expected 54.0). Similarly, the final August Services PMI reading for the eurozone showed below-consensus growth (52.9; expected 53.3) while the U.K.'s reading (53.7; expected 53.3) exceeded expectations. Treasuries spent the first 90 minutes of action near their starting levels, but rallied to fresh highs after the market received a signal about a weakening job market, as job openings fell to 7.673 mln from 7.910 mln in July, reaching their lowest level since early 2021. The post-data rally briefly caused the 2s10s spread to emerge from inversion, but the 2s10s spread returned to zero once longer tenors narrowed their underperformance gap to the 2-yr note. Today's disappointing data makes for a continuation of an underwhelming string of economic indicators, resulting in growing hopes for a 50-bps rate cut. The fed funds futures market is now pricing in a 43.0% implied likelihood of a 50-bps decrease, up from 38.0% yesterday. Crude oil fell below $70/bbl after giving back an overnight gain while the U.S. Dollar Index fell 0.5% to 101.37.
• Yield Check:
  • 2-yr: -12 bps to 3.77%
  • 3-yr: -10 bps to 3.64%
  • 5-yr: -9 bps to 3.57%
  • 10-yr: -8 bps to 3.77%
  • 30-yr: -6 bps to 4.07%

• News:
  • The Federal Reserve's Beige Book for September noted that only three Fed Districts reported slight growth since the last report while the remaining nine Districts reported activity that declined or was flat. Employment was steady while wage growth was modest. Consumer spending weakened in most Districts while auto sales varied. Manufacturing weakened in most Districts while commercial construction and real estate activity were mixed. Employment was little changed while wages and prices increased modestly.
  • The Philadelphia Fed started its search for a new President to replace President Harker whose term will end at the end of June.
  • The Atlanta Fed's GDPNow forecast for Q3 GDP was increased to 2.1% from 2.0% in the previous estimate.
  • The Bank of Canada lowered its policy rate by 25 bps to 4.25%, as expected.
  • Germany's Kiel Institute for the World Economy lowered its domestic growth forecast for 2024 to 0.1% from 0.2% while the outlook for 2025 was reduced to 0.5% from 1.1%. 
  • The secretary general of Japan's LDP entered the leadership race to replace outgoing Prime Minister Kishida.
  • China's August Caixin Services PMI hit 51.6 (expected 51.9; last 52.1).
  • Japan's August Services PMI hit 53.7 (expected 54.0; last 53.7).
  • Hong Kong's August Manufacturing PMI hit 49.4 (last 49.5).
  • India's August Services PMI hit 60.9 (expected 60.4; last 60.3).
  • Australia's Q2 GDP expanded 0.2% qtr/qtr, as expected (last 0.2%), growing 1.0% yr/yr, as expected (last 1.3%). August Services PMI hit 52.5 (expected 52.2; last 50.4). August AIG Construction Index fell to -38.1 from -23.2 and AIG Manufacturing Index fell to -30.8 from -19.5.
  • Eurozone's July PPI was up 0.8% m/m (expected 0.3%; last 0.6%) but down 2.1% yr/yr (expected -2.5%; last -3.3%). August Services PMI hit 52.9 (expected 53.3; last 51.9).
  • Germany's August Services PMI hit 51.2 (expected 51.4; last 52.5). 
  • U.K.'s August Services PMI hit 53.7 (expected 53.3; last 52.5). 
  • France's August Services PMI hit 55.0, as expected (last 50.1).
  • Italy's August Services PMI hit 51.4 (expected 52.5; last 51.7).
  • Spain's August Services PMI hit 54.6 (expected 54.8; last 53.9).
• Today's Data:
  • The July Trade Balance Report showed a widening in the deficit to $78.8 billion (Briefing.com consensus -$78.5 billion) from an upwardly revised $73.0 billion (from -$73.1 billion) in June. The widening was the result of imports being $7.1 billion more than June imports and exports being only $1.3 billion more than June exports.
    • The key takeaway from the report is the uptick in imports. While that will act as a drag on Q3 GDP forecasts, the increase in imports will nonetheless be construed as a reassuring demand signal for the U.S. economy. 
  • Factory orders increased 5.0% month-over-month in July (Briefing.com consensus 4.5%) following a 3.3% decline in June. Excluding transportation, factory orders increased 0.4% on the heels of a 0.1% increase in June. Shipments of manufactured goods jumped 0.9% in July following a 0.6% increase in June.
    • The key takeaway from the report is that business spending languished in July.
  • Job openings decreased to 7.673 million in July from a downwardly revised 7.910 million (from 8.184 million) in June.
  • The weekly MBA Mortgage Index was up 1.6% to follow last week's 0.5% increase. The Purchase Index rose 3.3% while the Refinance Index fell 0.3%.
• Commodities:
  • WTI crude: -1.8% to $69.13/bbl
  • Gold: +0.1% to $2525.40/ozt
  • Copper: -0.5% to $4.07/lb
• Currencies:
  • EUR/USD: +0.3% to 1.1077
  • GBP/USD: +0.3% to 1.3140
  • USD/CNH: -0.1% to 7.1142
  • USD/JPY: -1.1% to 143.85
• The Day Ahead:
  • 8:15 ET: August ADP Employment Change (Briefing.com consensus 150,000; prior 122,000)
  • 8:30 ET: Weekly Initial Claims (Briefing.com consensus 236,000; prior 231,000), Continuing Claims (prior 1.868 mln), revised Q2 Productivity (Briefing.com consensus 2.3%; prior 2.3%), and revised Q2 Unit Labor Costs (Briefing.com consensus 0.9%; prior 0.9%)
  • 9:45 ET: Final August S&P Global U.S. Services PMI (prior 55.0)
  • 10:00 ET: August ISM Non-Manufacturing (Briefing.com consensus 51.0%; prior 51.4%)
  • 10:30 ET: Weekly natural gas inventories (prior +35 bcf)
  • 11:00 ET: Weekly crude oil inventories (prior -0.85 mln)