Bond Market Update

Slowing Labor Market Growth Extends September Rally

• U.S. Treasuries recorded their fourth consecutive day of gains on Friday with yields settling at their lowest levels of the year. Treasuries opened the day in positive territory in anticipation of the August jobs report, which disappointed. The report showed the addition of 142,000 nonfarm payrolls (Briefing.com consensus 165,000), which was not that far from market expectations, but growth figures for July and June were revised down by a total of 76,000. While the report missed headline expectations, it still showed above-consensus growth in average hourly earnings (0.4%; Briefing.com consensus 0.3%) and a downtick in the Unemployment Rate to 4.2% from 4.3%. Fed Governor Waller (FOMC voter) said after the report was released that he supports a rate cut on September 18, but the fed funds futures market showed a notable decrease in the implied likelihood of a 50-bps cut to 27.0% from 40.0% yesterday. However, the market remains certain that at least a 25-bps cut will be announced in just under two weeks. Treasuries saw some volatility after the report was released, reaching their best levels in the late morning. The second half of the session saw a pullback that returned the long bond to little changed while shorter tenors backed down from their highs, but still finished comfortably in the green. This week's outperformance in shorter tenors helped the 2s10s spread emerge from inversion. The spread ended the week at six bps, up from -2 bps at last week's settlement. Crude oil fell past its December low, settling just $4/bbl above its low from last year, while the U.S. Dollar Index rose 0.1% to 101.21, narrowing this week's loss to 0.5%.
• Yield Check:
  • 2-yr: -10 bps to 3.65% (-28 bps this week)
  • 3-yr: -9 bps to 3.53% (-26 bps this week)
  • 5-yr: -5 bps to 3.49% (-23 bps this week)
  • 10-yr: -2 bps to 3.71% (-20 bps this week)
  • 30-yr: UNCH at 4.02% (-18 bps this week)

• News:
  • Australia reported strong home loan growth in July a day after Reserve Bank of Australia Governor Bullock made hawkish comments about the potential need for another rate hike.
  • Advanced technology exports to China are expected to see additional restrictions, according to Bloomberg.
  • Trading in Hong Kong was suspended due to a typhoon.
  • Japan's July Household Spending was down 1.7% m/m (expected -0.2%; last 0.1%) but up 0.1% yr/yr (expected 1.2%; last -1.4%). July Leading Index rose to 109.5 from 109.1 (expected 109.4) and Coincident Indicator was up 3.0% m/m (last -3.4%). 
  • South Korea's July Current Account surplus reached $9.13 bln (last surplus of $12.26 bln).
  • Australia's July Home Loans rose 2.9% m/m (expected 1.0%; last 1.0%) and July Invest Housing Finance was up 5.4% m/m (last 2.7%).
  • Eurozone's Q2 GDP growth was revised down to 0.2% qtr/qtr from 0.3% (expected 0.3%) while the yr/yr reading was left unrevised at 0.6%, as expected (last 0.4%). Q2 Employment increased by 0.2% qtr/qtr, as expected (last 0.3%).
  • Germany's July Industrial Production was down 2.4% m/m (expected -0.4%; last 1.7%), falling 5.3% yr/yr (last -3.6%). July trade surplus reached EUR16.8 bln (expected surplus of EUR21.0 bln; last surplus of EUR20.4 bln) as imports grew 5.4% m/m (expected 0.3%; last 0.3%) and exports increased 1.7% m/m (expected 1.2%; last -3.4%).
  • U.K.'s August Halifax House Price Index rose 0.3% m/m (expected 0.2%; last 0.9%), increasing 4.3% yr/yr (expected 4.2%; last 2.4%).
  • France's July Industrial Production was down 0.5% m/m (expected -0.3%; last 0.8%) and July trade deficit reached EUR5.9 bln (expected deficit of EUR6.5 bln; last deficit of EUR6.0 bln).
  • Italy's July Retail Sales rose 0.5% m/m (expected 0.1%; last -0.2%), increasing 1.0% yr/yr (last -1.0%). 
  • Spain's July Consumer Confidence rose to 89.4 from 88.4.
  • Swiss September SECO Consumer Climate fell to -35 from -19 (expected -33).
• Today's Data:
  • August nonfarm payrolls increased by 142,000 (Briefing.com consensus 165,000). The 3-month average for total nonfarm payrolls decreased to 116,000 from 141,000. July nonfarm payrolls revised to 89,000 from 114,000. June nonfarm payrolls revised to 118,000 from 179,000.
    • August private sector payrolls increased by 118,000 (Briefing.com consensus 142,000). July private sector payrolls revised to 74,000 from 97,000. June private sector payrolls revised to 97,000 from 136,000.
    • August unemployment rate was 4.2% (Briefing.com consensus 4.2%), versus 4.3% in July. Persons unemployed for 27 weeks or more accounted for 21.3% of the unemployed versus 21.6% in July. The U6 unemployment rate, which accounts for unemployed and underemployed workers, increased to 7.9% from 7.8%.
    • August average hourly earnings were up 0.4% (Briefing.com consensus 0.3%) versus 0.2% in July. Over the last 12 months, average hourly earnings have risen 3.8%, versus 3.6% for the 12 months ending in July.
    • The average workweek in August was 34.3 hours (Briefing.com consensus 34.3), versus 34.2 hours in July. Manufacturing workweek was little changed at 40.0 hours. Factory overtime increased 0.1 hour to 3.0 hours.
    • The labor force participation rate held steady at 62.7% and the employment-population ratio held steady at 60.0%.
• Commodities:
  • WTI crude: -2.1% to $67.68/bbl
  • Gold: -0.7% to $2525.30/ozt
  • Copper: -1.5% to $4.07/lb
• Currencies:
  • EUR/USD: -0.2% to 1.1084
  • GBP/USD: -0.4% to 1.3131
  • USD/CNH: +0.1% to 7.0932
  • USD/JPY: -0.7% to 142.40
• The Week Ahead:
  • Monday: July Wholesale Inventories (prior 0.2%) at 10:00 ET and July Consumer Credit (prior $8.9 bln) at 15:00 ET
  • Tuesday: August NFIB Small Business Optimism (prior 93.7) at 6:00 ET and $58 bln 3-yr Treasury note auction results at 13:00 ET
  • Wednesday: Weekly MBA Mortgage Index (prior 1.6%) at 7:00 ET; August CPI (prior 0.2%) and Core CPI (prior 0.2%) at 8:30 ET; weekly crude oil inventories (prior -6.87 mln) at 10:30 ET; and $39 bln 10-yr Treasury note auction results at 13:00 ET
  • Thursday: August PPI (prior 0.1%), Core PPI (prior 0.1%), weekly Initial Claims (prior 227,000), and Continuing Claims (prior 1.838 mln) at 8:30 ET; weekly natural gas inventories (prior +13 bcf) at 10:30 ET; $22 bln 30-yr Treasury bond auction results at 13:00 ET; and August Treasury Budget (prior -$243.7 bln) at 14:00 ET
  • Friday: August Import Prices (prior 0.1%), Import Prices ex-oil (prior 0.1%), Export Prices (prior 0.7%), and Export Prices ex-agriculture (prior 1.0%) at 8:30 ET; and final September University of Michigan Consumer Sentiment (prior 67.9) at 10:00 ET