Bond Market Update

Weak ADP Employment Report Fuels Midweek Rally

• U.S. Treasuries rallied on Wednesday with leadership from the front end after a weak ADP Employment Change report for September (-32,000; Briefing.com consensus 40,000) invited more questions about the present state of the labor market. The market was on track for a flat start after a night that featured the release of final Manufacturing PMI readings from major economies. Japan's Manufacturing PMI (48.5) stayed in contraction while South Korea's reading (50.7) returned to expansion. Meanwhile, eurozone's Manufacturing PMI (49.8) returned to contraction in September. However, Treasury futures rallied strongly just ahead of the cash start in response to the disappointing ADP Employment Change report, which was coupled with a downward revision to the reading from August (to -3,000 from +54,000). Treasuries added to their gains over the next hour, reaching their best levels just as the market received the ISM Manufacturing report for September (49.1%; Briefing.com consensus 49.2%), which pointed to ongoing contraction in the sector. The rest of the session saw some backtracking that returned longer tenors toward the midpoint of today's range while the 2-yr note remained near its high until the close. The weak jobs report gave another boost to already-strong expectations for a 25-basis point rate cut in four weeks. The U.S. government shut down, as expected, so there will be no more votes on a continuing resolution until at least Friday. This will delay the release of the Employment Situation report from the BLS. Crude oil fell for the third consecutive day, touching its lowest level since late May in the process, while the U.S. Dollar Index slipped 0.1% to 97.71.
• Yield Check:
  • 2-yr: -6 bps to 3.54%
  • 3-yr: -5 bps to 3.56%
  • 5-yr: -5 bps to 3.68%
  • 10-yr: -4 bps to 4.11%
  • 30-yr: -2 bps to 4.72%

• News:
  • The Atlanta Fed's GDPNow forecast for Q3 GDP was trimmed to 3.8% from 3.9% in the previous estimate.
  • President Trump said that he will meet with China's President Xi in four weeks. 
  • The White House is no longer nominating E.J. Antoni to lead the Bureau of Labor Statistics.
  • The Bank of Japan will reduce its bond purchases in Q4 by about 11%.
  • The Reserve Bank of India left its policy rate at 4.00% against expectations for a 25-basis point cut.
  • Taiwan rejected the request for even split of chip production in Taiwan and the U.S.
  • The European Commission is planning to increase tariffs on steel imports to about 50%.
  • European Central Bank policymaker De Guindos said that fiscal policy could result in higher yields in the EU.
  • Bank of England policymaker Mann said that keeping rates unchanged is the appropriate move, claiming that current policy is relatively loose.
  • Japan's Q3 Tankan All Big Industry Capex was up 12.5% (last 11.5%). Q3 Big Manufacturers Outlook Index remained at 12 (expected 13) and Q3 Large Non-Manufacturers Index remained at 34 (expected 33). September Manufacturing PMI hit 48.5 (expected 48.4; last 49.7).
  • South Korea's September trade surplus reached $9.56 bln (expected surplus of $7.81 bln; last surplus of $6.51 bln) as imports grew 8.2% yr/yr (expected 5.6%; last -4.1%) and exports rose 12.7% yr/yr (expected 7.2%; last 1.2%). September Manufacturing PMI hit 50.7 (last 48.3).
  • Singapore's Q3 URA Property Index was up 1.2% qtr/qtr (last 1.0%).
  • India's September Manufacturing PMI hit 57.7 (expected 58.5; last 59.3).
  • Australia's September Manufacturing PMI hit 51.4 (expected 51.6; last 51.6). September AIG Construction Index rose to 12.3 from 1.0 and AIG Manufacturing Index rose to -13.2 from -20.9.
  • New Zealand's August Building Consents increased 5.8% m/m (last 5.3%).
  • Eurozone's September Manufacturing PMI hit 49.8 (expected 49.5; last 50.7). Flash September CPI was up 0.1% m/m (last 0.1%), rising 2.2% yr/yr, as expected (last 2.2%). Flash Core CPI was up 0.1% m/m (last 0.3%), rising 2.3% yr/yr, as expected (last 2.3%).
  • Germany's September Manufacturing PMI hit 49.5 (expected 48.5; last 49.8).
  • U.K.'s September Nationwide HPI was up 0.5% m/m (expected 0.2%; last -0.1%), rising 2.2% yr/yr (expected 1.8%; last 2.1%). September Manufacturing PMI hit 46.2, as expected (last 46.2).
  • France's September Manufacturing PMI hit 48.2 (expected 48.1; last 50.4).
  • Italy's September Manufacturing PMI hit 49.0 (expected 49.9; last 50.4).
  • Spain's September Manufacturing PMI hit 51.5 (expected 53.8; last 54.3).
  • Swiss August Retail Sales fell 0.2% yr/yr (expected 0.5%; last 0.9%) and September Manufacturing PMI hit 46.3 (expected 47.9; last 49.0).
• Today's Data:
  • The ADP Employment Change report showed a 32,000 decrease in August payrolls (Briefing.com consensus 40,000) while the August reading was revised down to a decrease of 3,000 from an increase of 54,000.
  • The September ISM Manufacturing Index checked in at 49.1% for September (Briefing.com consensus: 49.2%), up from 48.7% in August. The dividing line between expansion and contraction is 50.0%, so the September figure, which is the seventh straight month below 50.0%, suggests manufacturing activity contracted at a slower pace than the prior month.
    • The key takeaway from the report is that the manufacturing sector remains in a state of contraction, with new order activity under pressure from tariff costs and uncertainty.
  • The S&P Global U.S. Manufacturing PMI hit 52.0 in the final reading for September, unchanged from the flash reading of 52.0 and down from the final August reading of 53.0.
  • The weekly MBA Mortgage Index was down 12.7% after rising 0.6% a week ago. The Refinance Index fell 20.6% while the Purchase Index was down 1.0%.
  • Weekly crude oil inventories increased by 1.792 mln barrels after decreasing by 607,000 barrels a week ago.
• Commodities:
  • WTI crude: -0.9% to $61.79/bbl
  • Gold: +0.6% to $3897.80/ozt
  • Copper: -0.6% to $4.88/lb
• Currencies:
  • EUR/USD: UNCH at 1.1734
  • GBP/USD: +0.3% to 1.3482
  • USD/CNH: UNCH at 7.1263
  • USD/JPY: -0.5% to 147.08
• The Day Ahead:
  • 8:30 ET: Weekly Initial Claims (Briefing.com consensus 220,000; prior 218,000) and Continuing Claims (prior 1.926 mln)
  • 10:00 ET: August Factory Orders (Briefing.com consensus 0.8%; prior -1.3%)
  • 10:30 ET: Weekly natural gas inventories (prior +75 bcf)