Bond Market Update

Longer Tenors Lead Friday Slide

• U.S. Treasuries ended Friday with losses across the curve, as the 2-yr note returned to unchanged for the week while longer tenors extended this week's losses. Treasuries followed yesterday's sharp slide with a quiet start after a night that saw reduced volume due to holiday closures in South Korea, India, and parts of Europe. The market received some noteworthy data, including weak July growth figures from China, countered by Japan's above-consensus flash Q2 GDP (0.3%; expected 0.1%). The U.S. session also featured noteworthy data, starting with an in-line Retail Sales report for July (0.5%), coupled with an upward revision to the June reading (to 0.9% from 0.6%), an Import/Export prices report that showed rising import prices in July, and a solid Empire State Manufacturing Survey (11.9; Briefing.com consensus 0.0). A bit later, the market learned that Industrial Production slipped an in-line 0.1% in July while the preliminary reading of the University of Michigan's Consumer Sentiment Index for August fell to 58.6 (Briefing.com consensus 61.3) from 61.7, showing an increase in one-year inflation outlook to 4.9% from 4.5% and an increase in the five-year outlook to 3.9% from 3.4%. Treasuries showed very little immediate reaction to the data, but they drifted toward lows in morning trade, extending their losses going into the early afternoon. The selling made for a continuation of yesterday's reversal that sent yields from their lowest levels of the month to fresh highs for the week with the 30-yr yield rising back above its 50-day moving average (4.892%) to a two-week high. Longer tenors underperformed this week, expanding the 2s10s spread by five basis points to 58 bps. Crude oil widened this week's loss to $1.15/bbl, or 1.8%, while the U.S. Dollar Index lost 0.4% today and this week, slipping past its 50-day moving average (98.10) to 97.84.
• Yield Check:
  • 2-yr: +2 bps to 3.76% (UNCH this week)
  • 3-yr: +2 bps to 3.72% (-1 bp this week)
  • 5-yr: +2 bps to 3.85% (+2 bps this week)
  • 10-yr: +4 bps to 4.33% (+4 bps this week)
  • 30-yr: +4 bps to 4.93% (+7 bps this week)

• News:
  • The Atlanta Fed's GDPNow forecast for Q3 remained at 2.5% in the latest update.
  • China's government reportedly warned foreign firms against stockpiling rare earth elements.
  • Japanese advertiser Dentsu reported mixed results an announced job cuts.
  • Standard & Poor's raised India's rating to BBB from BBB-.
  • Conglomerate ThyssenKrupp may sell a stake in its warship until to the German government.
  • China's July Industrial Production rose 5.7% yr/yr (expected 6.0%; last 6.8%), July Retail Sales increased 3.7% yr/yr (expected 4.6%; last 4.8%), July Fixed Asset Investment grew 1.6% yr/yr (expected 2.7%; last 2.8%), and July House Prices were down 2.8% yr/yr (last -3.2%). July Unemployment Rate rose to 5.2% from 5.0% (expected 5.1%).
  • Japan's Q2 GDP expanded 0.3% qtr/qtr (expected 0.1%: last 0.1%), growing 1.0% yr/yr (expected 0.4%; last 0.6%). Q2 GDP Capital Expenditure was up 1.3% qtr/qtr (expected 0.5%; last 1.0%), Q2 GDP External Demand was up 0.3% qtr/qtr (expected 0.2%: last -0.8%), Q2 GDP Private Consumption was up 0.2% qtr/qtr (expected 0.1%; last 0.2%), and Q2 GDP Price Index was up 3.0% yr/yr (expected 3.1%; last 3.3%). June Industrial Production rose 2.1% m/m (expected 1.7%; last -0.1%) while Capacity Utilization fell 1.0% m/m (last 2.0%).
  • Hong Kong's Q2 GDP expanded 0.4% qtr/qtr, as expected (last 1.9%), growing 3.1% yr/yr, as expected (last 3.0%).
  • New Zealand's July Business PMI hit 52.8 (last 48.8), July FPI was up 0.7% m/m (last 1.2%), and July Visitor Arrivals were down 2.5% m/m (last -0.5%).
  • Swiss Q2 GDP expanded 0.1% qtr/qtr (last 0.5%).
• Today's Data:
  • The July Retail Sales Report was a good report that was made even better by the upward revisions to the prior month's data. Total retail sales increased 0.5% month-over-month, as expected, following an upwardly revised 0.9% (from 0.6%) in June. Excluding autos, retail sales increased 0.3% month-over-month, as expected, following an upwardly revised 0.8% increase (from 0.5%) in June.
    • The key takeaway from the report, which isn't adjusted for inflation, is that it reflects a decent pace of consumer spending that isn't owed entirely to price increases; however, it does reveal a few points of spending caution, evidenced by the 0.6% decline in electronics and appliance stores, the 1.0% decline in building material and garden equipment and supplies dealers, and the 0.4% decline in food services and drinking places.
  • The July Import and Export Price Indexes sent some mixed signals. Import prices were up a sizable 0.4% month-over-month, but down 0.2% year-over-year, on the heels of a 0.1% decline in June. Excluding fuel, they were up 0.3% month-over-month, and up 0.9% year-over-year, following a 0.3% decline in June. Export prices increased 0.1% and were up 2.2% year-over-year. Excluding agricultural products, prices were also up 0.1% and up 2.0% year-over-year.
    • The key takeaway from the report is the uptick in import prices, which is clouding the inflation outlook in the sense that it is keeping the market guessing as to whether tariff inflation is going to ramp in coming months or if this is just a one-time bump in the road.
  • The August Empire State Manufacturing Survey showed a nice uptick to 11.9 (Briefing.com consensus: 0.0) from 5.5 in July. The dividing line between expansion and contraction for this survey is 0.0, so the August reading reflects manufacturing activity for the New York Fed region picking up pace from July.
  • Industrial production decreased 0.1% month-over-month in July (Briefing.com consensus -0.1%) following an upwardly revised 0.4% increase (from 0.3%) in June. The capacity utilization rate was 77.5% (Briefing.com consensus 77.5%), versus an upwardly revised 77.7% (from 77.6%) in June. Total industrial production increased 1.4% yr/yr, while the capacity utilization rate was 2.1 percentage points below its long-run average.
    • The key takeaway from the report is that industrial production activity was muted in July, with manufacturing output stalling due to output declining in all nondurable categories.
  • The preliminary University of Michigan Consumer Sentiment Index for August fell to 58.6 (Briefing.com consensus: 61.3) from the final reading of 61.7 for July. In the same period a year ago, the index stood at 67.9.
    • The key takeaway from the report is that it marked the first downturn in consumer sentiment in four months, driven by rising worries about inflation.
  • The Empire State Manufacturing survey rose to 11.9 in August from 5.5 in July.
  • Import prices were up 0.4% in July after decreasing a revised 0.1% (from +0.1%) in June. Excluding oil, import prices were up 0.3% after decreasing a revised 0.3% (from +0.1%) in June. Export prices were up 0.1% in July after increasing 0.5% in June. Excluding agriculture, export prices were up 0.1% after increasing 0.5% in June.
• Commodities:
  • WTI crude: -1.9% to $62.73/bbl
  • Gold: UNCH at $3382.50/ozt
  • Copper: +0.2% to $4.49/lb
• Currencies:
  • EUR/USD: +0.4% to 1.1702
  • GBP/USD: +0.2% to 1.3553
  • USD/CNH: +0.2% to 7.1881
  • USD/JPY: -0.4% to 147.21
• The Week Ahead:
  • Monday: August NAHB Housing Market Index (Briefing.com consensus 34; prior 33) at 10:00 ET
  • Tuesday: July Housing Starts (Briefing.com consensus 1.311 mln; prior 1.321 mln) and Building Permits (Briefing.com consensus 1.390 mln; prior 1.393 mln) at 8:30 ET
  • Wednesday: Weekly MBA Mortgage Index (prior 10.9%) at 7:00 ET; weekly crude oil inventories (prior +3.04 mln) at 10:30 ET; $16 bln 20-yr Treasury bond auction results at 13:00 ET; and July FOMC Minutes at 14:00 ET
  • Thursday: Weekly Initial Claims (Briefing.com consensus 222,000; prior 221,000), Continuing Claims (prior 1.956 mln), and August Philadelphia Fed Survey (Briefing.com consensus 9.0; prior 15.9) at 8:30 ET; Flash S&P Global U.S. Manufacturing PMI (prior 49.8) and flash S&P Global U.S. Services PMI (prior 55.7) at 9:45 ET; July Leading Indicators (Briefing.com consensus -0.1%; prior -0.3%) and July Existing Home Sales (Briefing.com consensus 3.92 mln; prior 3.93 mln) at 10:00 ET; and weekly natural gas inventories (prior +56 bcf) at 10:30 ET
  • Friday: Nothing of note