Bond Market Update

Long End Outperforms Despite Weak Bond Auction

• U.S. Treasuries retreated on Thursday with the short end leading the move while the long bond resisted despite a weak auction. The 30-yr bond outperformed from the start while shorter tenors opened with modest losses. The mostly lower start followed a night of gains in most global equity markets and news that President Trump threatened to impose a 100% tariff on imports of semiconductors for companies that do not have production facilities in the U.S. He also threatened to impose new tariffs on imports from China if China continues buying oil from Russia. Treasuries spent the bulk of the morning in a sideways range, showing a limited reaction to today's economic data, which showed above-consensus growth in Q2 Productivity (2.4%; Briefing.com consensus 2.2%), a larger-than-expected increase in Q2 Unit Labor Costs (1.6%; Briefing.com consensus 1.5%), and a larger-than-expected increase in weekly jobless claims (226,000; Briefing.com consensus 220,000). Treasuries remained inside their morning range through the release of the July Survey of Consumer Expectations from the New York Fed, which showed an uptick in year-ahead inflation expectations to 3.1% from 3.0% while the five-year outlook increased to 2.9% from 2.6%. Three-year expectations remained unchanged at 3.0%. The market finally broke out of its morning range in the early afternoon, sliding to fresh lows after the U.S. Treasury completed this week's trifecta of poor auctions with a disappointing $25 bln 30-yr bond sale that once again saw below-average foreign demand. The entire complex moved to lows in reaction to the auction, but the long bond maintained its daylong outperformance. Crude oil fell to its lowest closing level since early June while the U.S. Dollar Index rose 0.2% to 98.40.
• Yield Check:
  • 2-yr: +3 bps to 3.73%
  • 3-yr: +3 bps to 3.69%
  • 5-yr: +3 bps to 3.79%
  • 10-yr: +2 bps to 4.24%
  • 30-yr: +1 bp to 4.82%

• News:
  • The Atlanta Fed's GDPNow forecast for Q3 GDP remained at 2.5% in the latest estimate.
  • The Bank of England announced a 5-4 vote in favor of a 25-basis point rate cut to 4.00%, which was expected.
  • Switzerland's federal council will hold an extraordinary meeting after President Keller-Sutter returned from Washington without a trade deal.
  • Maersk CEO said that the shipping industry continues experiencing uncertainty, though freight rates and demand from China have been resilient.
  • Margin debt at the Shanghai Stock Exchange has increased to its highest level since 2015.
  • Banxico lowered its policy rate by 25 bps to 7.75%, as expected.
  • China's July trade surplus reached $98.24 bln (expected surplus of $105.20 bln; last surplus of $114.77 bln) as imports grew 4.1% yr/yr (expected -1.0%; last 1.1%) and exports rose 7.2% yr/yr (expected 5.4%; last 5.8%).
  • Japan's June Leading Index rose to 106.1 from 104.8 (expected 106.0) and Coincident Indicator was up 0.8% m/m (last 0.0%).
  • South Korea's June Current Account surplus $14.27 bln (last surplus of $10.14 bln)
  • Australia's June Building Approvals rose 11.9% m/m, as expected (last 3.2%), and June Private House Approvals were down 2.0% m/m, as expected (last 0.5%). June trade surplus reached AUD5.365 bln (expected surplus of AUD3.180 bln; last surplus of AUD1.604 bln) as imports fell 3.1% m/m (last 3.3%) and exports rose 6.0% m/m (last -3.0%).
  • New Zealand's Q3 Inflation Expectations remained at 2.3%.
  • Germany's June Industrial Production was down 1.9% m/m (expected -0.4%; last -0.1%), falling 3.5% yr/yr (expected -0.6%; last 0.0%). June trade surplus reached EUR14.9 bln (expected surplus of EUR17.8 bln; last surplus of EUR18.6 bln) as imports grew 4.2% m/m (expected 1.0%; last -3.9%) and exports rose 0.8% m/m (expected 0.5%; last -1.4%).
  • U.K.'s July Halfiax House Price Index was up 0.4% m/m (expected 0.1%; last 0.1%), rising 2.4% yr/yr (last 2.7%).
  • France's June Current Account deficit reached EUR3.40 bln (last deficit of EUR2.60 bln). June trade deficit remained at EUR7.6 bln (expected deficit of EUR7.5 bln).
  • Swiss July Unemployment Rate remained at 2.9%.
• Today's Data:
  • Q2 productivity increased 2.4% (Briefing.com consensus: 2.2%) following a downwardly revised 1.8% decline (from -1.5%) in Q1. Unit labor costs rose 1.6% (Briefing.com consensus: 1.5%) following an upwardly revised 6.9% (from 6.6%) in Q1. From the same quarter a year ago, nonfarm business sector labor productivity was up 1.3%.
    • The key takeaway from the report is that productivity improved noticeably from the first quarter, helping to tamp down unit labor costs. The 1.8% annualized rate of productivity growth in the current business cycle (starting Q4 2019), though, is still below the long-term rate of 2.1% since the first quarter of 1947.
  • Initial jobless claims for the week ending August 2 increased by 7,000 to 226,000 (Briefing.com consensus: 220,000). Continuing jobless claims for the week ending July 26 increased by 38,000 to 1.974 million, which is the highest level since November 6, 2021.
    • The key takeaway from the report, in light of the soft nonfarm payrolls data seen last week, is the jump in continuing jobless claims, which will be seen as a sign/symptom of a softening labor market.
  • Consumer credit increased by $7.4 billion in June (Briefing.com consensus: $8.6 billion) following an unrevised $5.1 billion increase in May.
    • The key takeaway from the report is that the entirety of the consumer credit expansion in June was driven by nonrevolving credit.
  • Wholesale Inventories increased by 0.1% in June (Briefing.com consensus 0.2%) after decreasing 0.3% in May.
  • Weekly natural gas inventories increased by 7 bcf after increasing by 48 bcf a week ago.
  • $25 bln 30-year Treasury bond auction results (prior 12-auction average):
    • High yield: 4.813% (4.626%).
    • Bid-to-cover: 2.27 (2.42).
    • Indirect bid: 59.5% (65.1%).
    • Direct bid: 23.0% (20.9%).
• Commodities:
  • WTI crude: -0.8% to $63.85/bbl
  • Gold: +0.6% to $3453.70/ozt
  • Copper: -0.5% to $4.40/lb
• Currencies:
  • EUR/USD: -0.3% to 1.1620
  • GBP/USD: +0.4% to 1.3407
  • USD/CNH: UNCH at 7.1847
  • USD/JPY: +0.1% to 147.53
• No Data on Tomorrow's Schedule