Bond Market Update

Economic Headwinds Remain in Focus

• U.S. Treasuries ended Thursday with slim gains in longer tenors while the short underperformed as the market pondered the implications of two noteworthy economic reports. Like yesterday, the trading day started with slim losses, but the entire complex bounced in immediate reaction to this morning's batch of data, which showed hotter-than-expected CPI in August (0.4%; Briefing.com consensus 0.3%) and a sharp jump in weekly jobless claims to 263,000 from 236,000, lifting the series to its highest level since mid-2023. The combination had stagflationary implications with a weaker labor market and persistent inflation both presenting a stiffening headwind to growth. The 10-yr note and the long bond held at their post-data highs into the early afternoon while shorter tenors slowly backtracked from their morning highs. The entire complex faced some pressure during the final two hours of action even though the U.S. Treasury completed this week's strong note and bond auction slate with a 30-yr bond reopening that was right on the screws. Crude oil gave back its gains from the past two days while the U.S. Dollar Index fell 0.3% to 97.52.
• Yield Check:
  • 2-yr: UNCH at 3.53%
  • 3-yr: UNCH at 3.49%
  • 5-yr: UNCH at 3.58%
  • 10-yr: -2 bps to 4.01%
  • 30-yr: -3 bps to 4.65%

• News:
  • The European Central Bank made no policy changes, but another rate cut is expected later in the year.
  • The Bank of Japan is reportedly preparing to start selling ETFs as part of its portfolio unwind.
  • Mexico will increase its tariff on imports of vehicles from Asia to 50% from 20%.
  • Germany's association of exporters expects 2025 export growth of just 2.5% while imports are expected to show 4.5% growth.
  • Volkswagen pledged to resist China's entry into the European market.
  • Japan's Q3 BSI Large Manufacturing Conditions rose to 3.8 from -4.8 (expected -3.3). August PPI was down 0.2% m/m (expected -0.1%; last 0.3%) but up 2.7% yr/yr, as expected (last 2.5%).
  • Australia's September MI Inflation Expectations rose to 4.7% from 3.9%.
• Today's Data:
  • Total CPI was up 0.4% month-over-month in August (Briefing.com consensus 0.3%) following a 0.3% increase in July. Core CPI, which excludes food and energy, was up 0.3%, as expected, following a 0.3% increase in July. On a year-over-year basis, total CPI was up 2.9%, versus 2.7% in July, while core CPI was up 3.1%, unchanged versus July and still well above the Fed's 2.0% inflation target (specifically for PCE inflation).
    • The key takeaway from the report (for Main Street) is that food prices were starkly elevated in August (+0.5%), as were shelter (+0.4%), apparel (+0.5%), transportation services (+1.0%), and gasoline (+1.9%) prices.
  • Initial jobless claims for the week ending September 6 spiked by 27,000 to 263,000 (Briefing.com consensus: 240,000). Continuing jobless claims for the week ending August 30 were 1.939 million, unchanged from the prior week.
    • The key takeaway from the report is rooted in the eye-opening initial jobless claims print, which will be construed in the market's mind as a weakening labor market signal and another basis for the Fed to cut rates in September, as well as in October and December.
  • The Treasury Budget for August showed a deficit of $344.8 billion compared to a deficit of $380.1 billion in the same period a year ago. The August deficit resulted from outlays ($689.1 billion) exceeding receipts ($344.3 billion). The Treasury Budget data are not seasonally adjusted so the August deficit cannot be compared to the July deficit of $291.1.
    • The key takeaway from the report is that it underscores the large budget deficit the Treasury is running and how much larger it would be if not for the ramp-up in customs duties this fiscal year.
  • Weekly natural gas inventories increased by 71 bcf after increasing by 55 bcf a week ago.
  • $22 bln 30-year Treasury bond reopening results (prior 12-auction average):
    • High yield: 4.651% (4.667%).
    • Bid-to-cover: 2.38 (2.41).
    • Indirect bid: 62.0% (64.7%).
    • Direct bid: 28.0% (21.5%).
• Commodities:
  • WTI crude: -2.1% to $62.36/bbl
  • Gold: -0.2% to $3673.80/ozt
  • Copper: +0.9% to $4.66/lb
• Currencies:
  • EUR/USD: +0.3% to 1.1737
  • GBP/USD: +0.4% to 1.3580
  • USD/CNH: UNCH at 7.1140
  • USD/JPY: -0.2% to 147.12
• The Day Ahead:
  • 10:00 ET: Preliminary September University of Michigan Consumer Sentiment (Briefing.com consensus 59.2; prior 58.2)