Bond Market Update

Strong Q2 GDP and Falling Rate Cut Odds Weigh

• U.S. Treasuries finished Wednesday on their lows, sending the 10-yr yield back to its 200-day moving average (4.376%). The trading day started with modest losses that were widened in reaction to a strong advance reading of Q2 GDP (3.0%; Briefing.com consensus 2.5%), which followed a strong ADP Employment Change report for July (104,000; Briefing.com consensus 78,000). The morning losses were narrowed as the day progressed, with shorter tenors revisiting their starting levels in immediate reaction to the FOMC Statement, which did not contain many surprises. The Fed opted to keep the fed funds rate range between 4.25% and 4.50%, though Fed Governors Waller and Bowman voted in favor of a 25-basis point rate cut, representing the first dissent by two policymakers since 1993. Late trade saw a slide to lows after Fed Chairman Powell said during his press conference that the economy is not showing signs of being held back by restrictive policy and that the labor market remains solid. This observation pressured September rate cut odds with the market now seeing just a 48.1% implied likelihood of a September cut, down from 64.6% yesterday. The July FOMC decision overshadowed the morning release of the U.S. Treasury's latest quarterly refunding statement, in which the Treasury said that the frequency of nominal buybacks of longer-dated Treasuries will be increased. Crude oil built on its gains from the past two days while the U.S. Dollar Index jumped 0.9% to 99.79, extending this week's rally to 2.2%.
• Yield Check:
  • 2-yr: +6 bps to 3.94%
  • 3-yr: +7 bps to 3.89%
  • 5-yr: +6 bps to 3.97%
  • 10-yr: +5 bps to 4.38%
  • 30-yr: +4 bps to 4.91%

• News:
  • President Trump announced that imports of semi-finished copper products and copper-intensive derivative products will be charged a 50% tariff.
  • President Trump said that India's tariff rate may end up between 20% and 25%.
  • Germany's government approved a budget for 2026.
  • Singapore's Q2 Unemployment Rate rose to 2.1% from 2.0%.
  • Australia's Q2 CPI was up 0.7% qtr/qtr (expected 0.8%; last 0.9%), rising 2.1% yr/yr, as expected (last 2.4%). June CPI Indicator was up 1.9% yr/yr (expected 2.1%; last 2.1%).
  • New Zealand's July ANZ Business Confidence hit 47.8 (last 46.3).
  • Eurozone's Q2 GDP expanded 0.1% qtr/qtr (expected 0.0%; last 0.6%), growing 1.4% yr/yr (expected 1.2%; last 1.5%). July Business and Consumer Survey rose to 95.8 from 94.2 (expected 94.5).
  • Germany's June Retail Sales rose 1.0% m/m (expected 0.5%; last -0.6%), increasing 4.9% yr/yr (last 4.6%). Flash Q2 GDP contracted 0.1% qtr/qtr, as expected (last 0.4%) but was up 0.4% yr/yr (expected 0.2%; last 0.0%).
  • France's flash Q2 GDP expanded 0.3% qtr/qtr (expected 0.1%; last 0.1%), growing 0.7% yr/yr (last 0.6%). June Consumer Spending was up 0.6% m/m (expected -0.3%; last 0.1%).
  • Italy's flash Q2 GDP contracted 0.1% qtr/qtr (expected 0.1%; last 0.3%) but was up 0.4% yr/yr (expected 0.6%; last 0.7%). May Industrial Sales fell 2.2% m/m (last 1.4%), dropping 1.8% yr/yr (last 0.9%).
  • Spain's July CPI was down 0.1% m/m (last 0.7%), rising 2.7% yr/yr (expected 2.3%; last 2.3%). July Core CPI was up 2.3% yr/yr (last 2.2%). July Business Confidence rose to -4.9 from -5.2.
  • Swiss July KOF Leading Indicators rose to 101.1 from 96.3 (expected 97.9). July ZEW Expectations rose to 2.4 from -2.1.
• Today's Data:
  • The Advance Q2 GDP report showed real GDP increasing at an annual rate of 3.0% (Briefing.com consensus: 2.5%) following a 0.5% decline for the first quarter. The GDP Deflator increased 2.0% (Briefing.com consensus: 2.6%) following a 3.8% increase in the first quarter.
    • The key takeaway from the report is the recognition that the stronger growth was fueled by the decrease in imports (-30.3%), which are a subtraction in the calculation of GDP. The net exports component contributed 4.99 percentage points to Q2 GDP growth.
  • The ADP Employment Change Report for July showed private sector employment increasing by 104,000 (Briefing.com consensus: 78,000) following an upwardly revised decline of 23,000 (from -33,000) in June.
    • The key takeaway is that, while the overall employment growth was modest, it was broad-based with gains for small, medium, and large establishments. In brief, it was not a report that signals any material weakness in the labor market.
  • Pending Home Sales were down 0.8% in June (Briefing.com consensus 0.4%) after increasing 1.8% in May.
  • The weekly MBA Mortgage Index was down 3.8% after increasing 0.8% a week ago. The Purchase Index was down 5.8% while the Refinance Index decreased 1.1%.
  • Weekly crude oil inventories increased by 7.70 mln barrels after decreasing by 3.17 mln barrels a week ago.
• Commodities:
  • WTI crude: +1.2% to $70.03/bbl
  • Gold: +0.9% to $3352.80/ozt
  • Copper: -0.9% to $5.58/lb
• Currencies:
  • EUR/USD: -1.1% to 1.1418
  • GBP/USD: -0.9% to 1.3231
  • USD/CNH: +0.4% to 7.2108
  • USD/JPY: +0.7% to 149.41
• The Day Ahead:
  • 8:30 ET: June Personal Income (Briefing.com consensus 0.3%; prior -0.4%), Personal Spending (Briefing.com consensus 0.4%; prior -0.1%), PCE Prices (Briefing.com consensus 0.3%; prior 0.1%), core PCE Prices (Briefing.com consensus 0.3%; prior 0.2%), Q2 Employment Cost Index (Briefing.com consensus 0.8%; prior 0.9%), weekly Initial Claims (Briefing.com consensus 220,000; prior 217,000), and Continuing Claims (prior 1.955 mln)
  • 9:45 ET: July Chicago PMI (Briefing.com consensus 42.1; prior 40.4)
  • 10:30 ET: Weekly natural gas inventories (prior +23 bcf)