Bond Market Update

Weighed Down By Solid Data

• U.S. Treasuries retreated on Thursday with shorter tenors pacing a continuation of post-FOMC selling while the long bond outperformed, finishing modestly higher. The trading day started with modest losses after a night that saw some speculation about an October rate hike from the Bank of Japan and solidifying expectations for the European Central Bank to hold its policy steady for the near future. Treasuries widened their starting losses after today's economic data was better than expected. Q2 GDP was revised up to 3.8% from 3.3%, Durable Orders grew unexpectedly in August (2.9%; Briefing.com consensus -0.5%), and weekly Initial Claims decreased (218,000; Briefing.com consensus 238,000). The combination suggested that the economy is holding up well, but that complicates the market's hope for multiple rate cuts before the end of the year. Shorter tenors remained near their lows into the close while longer tenors finished near their rebound highs after holding their ground through a weak $44 bln 7-yr note offering. Crude oil stayed near $65/bbl while the U.S. Dollar Index rose 0.7% to 98.54.
• Yield Check:
  • 2-yr: +6 bps to 3.66%
  • 3-yr: +6 bps to 3.66%
  • 5-yr: +6 bps to 3.77%
  • 10-yr: +3 bps to 4.17%
  • 30-yr: -1 bp to 4.75%

• News:
  • Former Bank of Japan policymaker Sakurai said that he sees a potential for a rate increase in October.
  • Japan is planning to reduce its issuance of longer-dated JGBs.
  • Some South Korean officials are hesitant to commit to the investment deal with the U.S. unless safeguards like currency swaps are put into place.
  • China's Ministry of Commerce aims to increase digital consumption.
  • The Swiss National Bank left its policy rate at 0.00%, as expected.
  • European Central Bank policymaker Kazimir said that the ECB's inflation target has been met.
  • Japan's August Corporate Services Price Index was up 2.7% yr/yr (expected 2.9%; last 2.6%).
  • Hong Kong's August trade deficit reached $25.4 bln (last deficit of $34.1 bln) as imports grew 11.5% m/m (last 16.5%) and exports rose 14.5% m/m (last 14.3%).
  • Eurozone's August M3 Money Supply was up 2.9% yr/yr (expected 3.3%; last 3.4%), August Private Sector Loans grew 2.5% yr/yr (expected 2.3%; last 2.4%), and August loans to nonfinancials increased 3.0% yr/yr (last 2.8%).
  • Germany's October GfK Consumer Climate rose to -22.3 from -23.5 (expected -23.3).
  • U.K.'s September CBI Distributive Trades Survey rose to -29 from -32 (expected -31).
  • France's September Consumer Confidence remained at 87, as expected.
• Today's Data:
  • The third estimate for Q2 GDP was revised up to 3.8% (Briefing.com consensus: 3.3%) from the second estimate of 3.3%, spurred on by an upward revision to consumer spending. The GDP Price Deflator was revised up to 2.1% (Briefing.com consensus: 2.0%) from the second estimate of 2.0%.
    • The key takeaway from the report is that the consumer and the economy in aggregate were still operating in a solid state in Q2. Real final sales to private domestic purchasers were up 2.9% versus 1.9% in the second estimate.
  • Weekly initial jobless claims for the week ending September 20 decreased by 14,000 to 218,000 (Briefing.com consensus: 238,000), while continuing jobless claims for the week ending September 13 decreased by 2,000 to 1.926 million.
    • The key takeaway from the report is the recognition that initial jobless claims—a leading indicator—are running at levels more consistent with a strong labor market than a weak one. If nothing else, there certainly wasn't a lot of firing activity in the week ending September 20.
  • Durable goods orders increased 2.9% month-over-month in August (Briefing.com consensus: -0.5%) following an upwardly revised 2.7% decline (from -2.8%) in July. Excluding transportation, durable goods orders rose 0.4% month-over-month (Briefing.com consensus: -0.1%) following a downwardly revised 1.0% increase (from 1.1%) in July.
    • The key takeaway from the report is the nondefense capital good orders, excluding aircraft—a proxy for business spending—jumped 0.6% on the heels of a 0.8% increase in July.
  • The Advance International Trade in Goods deficit narrowed to $85.5 billion from an upwardly revised $102.8 billion (from -$103.6 billion) in July. Advance Retail Inventories were flat following a downwardly revised 0.1% increase (from 0.2%) in July, and Advance Wholesale Inventories were down 0.2% following a downwardly revised unchanged reading (from 0.2%) in July.
    • The key takeaway from the report is that it had tariff policies written on it, evidenced by the fact that imports were $19.6 billion less than July imports, while exports were $2.3 billion less than July exports.
  • Existing home sales dipped 0.2% month-over-month in August to a seasonally adjusted annual rate of 4.00 million (Briefing.com consensus 3.99 million) from an unrevised 4.01 million in July. Sales were up 1.8% on a year-over-year basis.
    • The key takeaway from the report is that home sales in August were still constrained by high prices, higher mortgage rates, and limited supply. The biggest month-over-month increase in sales was in the Midwest, which is also the region with the lowest median price (by a lot).
  • Weekly natural gas inventories increased by 75 bcf after increasing by 90 bcf a week ago.
  • $44 bln 7-year Treasury note auction results (prior 12-auction average):
    • High yield: 3.953% (4.153%).
    • Bid-to-cover: 2.40 (2.62).
    • Indirect bid: 56.4% (69.7%).
    • Direct bid: 31.6% (20.9%).
• Commodities:
  • WTI crude: UNCH at $65.01/bbl
  • Gold: +0.1% to $3770.90/ozt
  • Copper: -1.2% to $4.76/lb
• Currencies:
  • EUR/USD: -0.7% to 1.1655
  • GBP/USD: -0.8% to 1.3335
  • USD/CNH: +0.2% to 7.1464
  • USD/JPY: +0.7% to 149.85
• The Day Ahead:
  • 8:30 ET: August Personal Income (Briefing.com consensus 0.3%; prior 0.4%), Personal Spending (Briefing.com consensus 0.4%; prior 0.5%), PCE Prices (Briefing.com consensus 0.3%; prior 0.2%), and Core PCE Prices (Briefing.com consensus 0.2%; prior 0.3%)
  • 10:00 ET: Final September University of Michigan Consumer Sentiment (Briefing.com consensus 55.4; prior 55.4)