Bond Market Update

Bid Persists Ahead of August Jobs Report

• U.S. Treasuries climbed again on Thursday, leaving the 10-yr yield just six basis points above its August low (3.669%) ahead of tomorrow's release of the Employment Situation report for August (Briefing.com consensus 165,000; prior 114,000). Employment was also atop the market's mind today, as Treasuries rallied out of the gate, supported by the release of the ADP Employment Change report for August, which showed the addition of just 99,000 nonfarm payrolls (Briefing.com consensus 150,000), the lowest total since September 2023. The next couple reports were a bit better, as jobless claims decreased unexpectedly while revisions to Q2 productivity (to 2.5% from 2.3%) and unit labor costs (to 0.4% from 0.9%) improved the overall tone of that report. Treasuries built on their gains in early morning action, but faced some brief pressure after the ISM Services PMI for August (51.5%; Briefing.com consensus 51.0%) showed an unexpected acceleration in activity in the services sector. The pullback found support just below yesterday's closing levels with the long bond and the 10-yr note slowly rising to fresh highs in the early afternoon while 5s and shorter tenors finished a touch below their opening levels. Crude oil made another failed attempt at a bounce, remaining near its December low despite bullish inventory data, while the U.S. Dollar Index slipped 0.3% to 101.11.
• Yield Check:
  • 2-yr: -2 bps to 3.75%
  • 3-yr: -2 bps to 3.62%
  • 5-yr: -3 bps to 3.54%
  • 10-yr: -4 bps to 3.73%
  • 30-yr: -4 bps to 4.02%

• News:
  • Former Brexit negotiator Michel Barnier has been appointed the new prime minister of France.
  • The Bank of England's latest Decision Maker Panel survey showed that year-ahead inflation expectations remained at 2.7% while the three-year outlook rose to 2.7% from 2.5%. Meanwhile, the British Chamber of Commerce believes that CPI will not return to target until early 2027.
  • Germany's ifo Institute lowered its domestic growth forecast for 2024 to stagnation from 0.4% while the outlook for 2025 was reduced to 0.9% from 1.5%.
  • China's government will reportedly split its planned mortgage refinancing scheme into two parts.
  • China's President Xi spoke in favor of deepening ties with African countries.
  • Reserve Bank of Australia Governor Bullock said that it is too early to consider rate cuts, adding that tighter policy may be needed if inflation doesn't recede.
  • Japan's July Wages grew 3.6% yr/yr (expected 3.0%; last 4.5%). 
  • South Korea's Q2 GDP contracted 0.2% qtr/qtr, as expected (last 1.3%) but was up 2.3% yr/yr, as expected (last 3.3%).
  • Singapore's July Retail Sales rose 3.1% m/m (last -3.7%), increasing 1.0% yr/yr (last -0.6%).
  • Australia's July trade surplus reached AUD6.01 bln (expected surplus of AUD5.05 bln; last surplus of AUD5.43 bln) as imports fell 0.8% m/m (last 0.4%) and exports rose 0.7% m/m (last 1.4%).
  • Eurozone's July Retail Sales rose 0.1% m/m, as expected (last -0.4%) but were down 0.1% yr/yr (expected 0.1%; last -0.4%).
  • Germany's July Factory Orders rose 2.9% m/m (expected -1.6%; last 4.6%).
  • U.K.'s August Construction PMI hit 53.6 (expected 54.6; last 55.3).
  • Swiss August Unemployment Rate remained at 2.5%, as expected.
• Today's Data:
  • The ISM Services PMI edged up to 51.5% in August (Briefing.com consensus 51.0%) from 51.4% in July. The dividing line between expansion and contraction is 50.0%, so the August reading reflects services sector activity expanding at nearly the same pace as July.
    • The key takeaway from the report is that overall activity in the largest sector of the U.S. economy remains in an expansion mode, which is what the market, worried about a possible hard landing, wants to see. Slow to moderate growth, the report said, was noted across many industries.
  • The ADP report showed private-sector employment increased by 99,000 jobs in August. That was the lowest level of job creation in the private sector since 2021. The job gains were concentrated across medium-sized establishments (68,000) and large-sized establishments (42,000). Small-sized establishments showed a decrease of 9,000 positions.
  • Initial jobless claims for the week ending August 31 decreased by 5,000 to 227,000 (Briefing.com consensus 236,000) while continuing jobless claims for the week ending August 24 decreased by 22,000 to 1.838 million. That is the 13th consecutive week that continuing claims have been above 1.800 million.
    • The key takeaway from the report is that layoff activity remains relatively tame; however, so does hiring activity, evidenced by the elevated stickiness of continuing jobless claims.
  • The revised Q2 Productivity report showed productivity revised up to 2.5% (Briefing.com consensus 2.3%) from the preliminary reading of 2.3%. Unit labor costs were revised down to 0.4% (Briefing.com consensus 0.9%) from the preliminary reading of 0.9%.
    • The key takeaway from the report was the friendly inflation view embedded in the softening unit labor costs. They were up just 0.3% over the last four quarters, which is the lowest rate since the fourth quarter of 2013.
  • The S&P Global U.S. Services PMI hit 55.7 in the final reading for August, up from 55.2 in the preliminary reading and 55.0 in the final reading for July.
  • Weekly crude oil inventories decreased by 6.87 mln barrels after decreasing by 846,000 barrels a week ago.
  • Weekly natural gas inventories increased by 13 bcf after increasing by 35 bcf a week ago.
• Commodities:
  • WTI crude: UNCH at $69.14/bbl
  • Gold: +0.7% to $2543.20/ozt
  • Copper: +1.5% to $4.13/lb
• Currencies:
  • EUR/USD: +0.2% to 1.1104
  • GBP/USD: +0.2% to 1.3170
  • USD/CNH: -0.3% to 7.0891
  • USD/JPY: -0.1% to 143.42
• The Day Ahead:
  • 8:30 ET: August Nonfarm Payrolls (Briefing.com consensus 165,000; prior 114,000), Nonfarm Private Payrolls (Briefing.com consensus 142,000; prior 97,000), Average Hourly Earnings (Briefing.com consensus 0.3%; prior 0.2%), Unemployment Rate (Briefing.com consensus 4.2%; prior 4.3%), and Average Workweek (Briefing.com consensus 34.3; prior 34.2)