Bond Market Update

Falling Flat

• U.S. Treasuries had a mixed outing in a curve-flattening trade that was dictated by the underperformance of the front end of the curve versus the back end. The session featured a narrowing in the trade deficit in June and a weaker-than-expected ISM Services Report for July that also included a jump in the prices index and a further retreat in the employment index. Those reports were followed by a relatively disappointing 3-yr note auction that saw weak interest on the part of indirect bidders. Separately, President Trump indicated that he may be announcing a replacement for Fed Governor Kugler soon and that there is a possibility whoever fills her seat could eventually be nominated for Fed Chair. The president also indicated that Treasury Secretary Bessent does not want the Fed Chair job and that he has taken Mr. Bessent's name "off the list," which currently includes four people being considered by the president, including former Fed Governor Warsh and NEC Director Hassett.
• Yield Check:
  • 2-yr: +4 bps to 3.72%
  • 3-yr: +3 bps to 3.68%
  • 5-yr: +3 bps to 3.77%
  • 10-yr: unch at 4.20%
  • 30-yr: -3 bps to 4.77%

• News:
  • Japan's top trade negotiator is reportedly back in Washington, seeking a written confirmation of the trade deal reached with the U.S.
  • Expectations for the next rate hike from the Bank of Japan have reversed significantly.
  • China's Agriculture Ministry noted that this fall's grain production is expected to be pressured by floods and droughts.
  • China's July S&P Global Services PMI hit 52.6 (expected 50.4; last 50.6). 
  • Japan's July Services PMI hit 53.6 (expected 53.5; last 51.7).
  • South Korea's July CPI was up 0.2% m/m, as expected (last 0.0%), rising 2.1% yr/yr, as expected (last 2.2%).
  • India's July Services PMI hit 60.5 (expected 59.8; last 60.4).
  • Hong Kong's July Manufacturing PMI hit 49.2 (last 47.8).
  • Singapore's June Retail Sales were down 1.2% m/m (last 1.0%), rising 2.3% yr/yr (last 1.3%).
  • Australia's July ANZ Job Advertisements were down 1.0% m/m (last 1.6%) and July Services PMI hit 54.1 (expected 53.8; last 53.8).
  • New Zealand's ANZ Commodity Price Index was down 1.8% m/m (last -2.4%).
  • Eurozone's July Services PMI hit 51.0 (expected 51.2; last 50.5). June PPI was up 0.8% m/m (expected 0.9%; last -0.6%), rising 0.6% yr/yr (expected 0.5%; last 0.3%).
  • Germany's July Services PMI hit 50.6 (expected 50.1; last 49.7).
  • U.K.'s July Services PMI hit 51.8 (expected 51.2; last 52.8).
  • France's July Services PMI hit 48.5 (expected 49.7; last 49.6). June Industrial Production was up 3.8% m/m (expected 0.8%; last -0.7%). June government budget deficit reached EUR100.4 bln (last deficit of EUR94.0 bln).
  • Italy's July Services PMI hit 52.3 (expected 52.5; last 52.1).
  • Spain's July Services PMI hit 55.1 (expected 52.6; last 51.9) and June Industrial Production was up 2.3% yr/yr (last 1.7%).
• Today's Data:
  • The trade deficit narrowed to $60.2 billion in June (Briefing.com consensus: -$62.0 billion) from a downwardly revised $71.7 billion (from -$71.5 billion) in May. That improvement stemmed from imports being $12.8 billion less than May imports, while exports were $1.3 billion less than May exports.
    • The key takeaway from the report is that it reflects the fact that tariff actions by the U.S. and the uncertainty related to the tariffs have impeded global trade activity.
  • The ISM Services PMI decreased to 50.1% in July (Briefing.com consensus 51.5%) from 50.8% in June. The dividing line between expansion and contraction is 50.0%, so the July reading reflects services sector activity teetering on the brink of a contraction.
    • The key takeaway from the report is that it reflects a slowdown in growth for the country's largest sector, accompanied by a faster contraction in employment and a faster increase in prices. It is a combination that will provoke stagflation chatter.
  • Final July S&P Global U.S. Services PMI (Actual 55.7; prior 52.9)
  • The $58 bln 3-yr note auction saw a high yield of 3.669% that tailed the when-issued yield by 0.7 basis points. Indirect bidders accounted for 54% of total competitive bids versus the prior 12-auction average of 65.7%.
• Commodities:
  • WTI Crude: -1.8% to $65.11/bbl
  • Gold: +0.3% to $3435.40/ozt
  • Copper: -1.1% to $4.39/lb
• Currencies:
  • EUR/USD: flat at 1.1568
  • GBP/USD: flat at 1.3289
  • USD/CNH: +0.1% to 7.1896
  • USD/JPY: +0.4% to 147.67
• The Day Ahead:
  • 07:00 ET: MBA Mortgage Applications Index (prior -3.8%)
  • 10:30 ET: EIA Crude Oil Inventories (prior +7.70M)
• Treasury Auctions:
  • 13:00 ET: $42 bln 10-yr Treasury note auction results