Bond Market Update

Sticky Inflation

• U.S. Treasuries traded calmly overnight following the release of a trove of economic data out of China that featured a stronger-than-expected Q2 GDP print and June retail sales, fixed asset investment, and industrial production data that was mixed relative to expectations. The calmness faded, however, after the release of the June CPI report at 8:30 a.m. ET, which saw the year-over-year rates for total CPI and core CPI tick higher versus May, and several index components showing some possible tariff-induced inflation pressures (or simply higher inflation if not). That view of things led to a pickup in selling interest across the curve, rooted in the sticky inflation and the notion that the Fed will view today's report as a basis to continue with a wait-and-see policy mindset. The probability of at least a 25 basis point rate cut to 4.00-4.25% at the September FOMC meeting slipped to 54.0%, versus 62.6% a day ago, according to the CME FedWatch Tool. The dollar rallied after the report, mirroring the notion that rates may be sticking higher for longer. The U.S. Dollar Index was up 0.6% to 98.64.
• Yield Check:
  • 2-yr: +6 bps to 3.96%
  • 3-yr: +6 bps to 3.93%
  • 5-yr: +7 bps to 4.05%
  • 10-yr: +6 bps to 4.49%
  • 30-yr: +5 bps to 5.02%

• News:
  • EU preparing countermeasures to respond to tariffs which will target cars and planes, according to Politico
  • President Trump confirms details of Indonesia trade deal; Indonesia will purchase $15 bln in U.S. energy, $4.5 billion in American agricultural products, and 50 Boeing (BA) jets
  • Senator Dave McCormick and President Donald Trump confirm $90 billion in energy and innovation investments for Pennsylvania
  • Senate Majority Leader John Thune says the Senate will hold off on advancing Russia sanctions legislation after President Trump promised to use his own authority to impose 100% secondary tariffs on Russia in 50 days if Russia doesn't stop war in Ukraine, according to Politico
  • JGB yields continued their ascent, with the 10-yr reaching its highest levels (1.60%) since October 2008. The 20-yr and 30-yr yields moved to multi-year highs, as market participants expressed their concerns about the LDP possibly losing its ruling coalition in the upper house and ceding such control to opposition parties pushing populist agendas that would lead to more bond issuance.
  • NVIDIA is rallying in pre-market trading after getting approval to resume sales of its H20 AI chip to China
  • France's prime minister is advancing a deficit reduction plan that includes tax increases and EUR40 bln of spending cuts that some suggest could spark a government collapse, according to Bloomberg
  • China's Q2 GDP 1.1% qtr/qtr (expected 0.9%; last 1.2%) and 5.3% YTD (expected 5.1%; last 5.4%); June Industrial Production 6.8% yr/yr (expected 5.6%; last 5.8%); June Retail Sales 4.8% yr/yr (expected 5.2%; last 6.4%); June Fixed Asset Investment 2.8% yr/yr (expected 3.6%; last 3.7%); June Unemployment Rate 5.0% (expected 5.0%; last 5.0%); June House Prices -3.2% yr/yr (last -3.5%)
  • Eurozone's May Industrial Production 1.7% m/m (expected 1.1%; last -2.2%) and 3.7% yr/yr (expected 2.9%; last 0.2%); July ZEW Economic Sentiment 36.1 (expected 37.8; last 35.3)
  • Germany's July ZEW Economic Sentiment 52.7 (expected 50.8; last 47.5)
• Today's Data:
  • Total CPI was up 0.3% month-over-month in June (Briefing.com consensus: 0.2%) following a 0.1% increase in May. That left total CPI up 2.7% year-over-year, versus 2.4% in May. Core CPI, which excludes food and energy, was up 0.2% month-over-month (Briefing.com consensus: 0.3%) following a 0.1% increase in May. That left core CPI up 2.9% year-over-year, versus 2.8% in May. There were some positive inflation readings, like shelter moderating to a 0.2% m/m increase from 0.3%, and new vehicle prices sliding 0.3% for the second straight month. However, there were some tariff distractions, so to speak, with apparel prices up 0.4% after being down 0.4% in May, and household furnishings and supplies prices rising 1.0% following a 0.3% increase in May.
    • The key takeaway from the report is that it will keep the Fed in its wait-and-see mode, not yet convinced that tariffs won't drive up inflation.
  • July Empire State Manufacturing 5.5 (Briefing.com consensus -11.6), following -16.0 in June. The dividing line between expansion and contraction is 0.0.
• Commodities:
  • WTI crude: -0.5% to $66.58/bbl
  • Gold: -0.7% to $3337.30/ozt
  • Copper: +0.5% to $5.58/lb
• Currencies:
  • EUR/USD: -0.6% to 1.1600
  • GBP/USD: -0.3% to 1.3384
  • USD/CNH: +0.2% to 7.1854
  • USD/JPY: +0.8% to 148.91
• The Day Ahead:
  • 07:00 ET: MBA Mortgage Applications Index (prior 9.4%)
  • 08:30 ET: June PPI (Briefing.com consensus: 0.2%; prior 0.1%) and core PPI (Briefing.com consensus: 0.2%; prior 0.1%)
  • 09:15 ET: June Industrial Production (Briefing.com consensus: 0.1%; prior -0.2%) and Capacity Utilization (Briefing.com consensus: 77.4%; prior 77.4%)
  • 10:00 ET: Fed Governor Barr (FOMC voter)
  • 10:30 ET: EIA Crude Oil Inventories (prior +7.07M)
  • 14:00 ET: Fed's Beige Book
  • 16:30 ET: New York Fed President Williams (FOMC voter)