Bond Market Update

More Gains Ahead of Jobs Report

• U.S. Treasuries edged higher on Thursday, adding to their solid gains from yesterday's session. Intraday action unfolded in generally quiet fashion with Treasuries spending the day in a narrow sideways range with an upward bias. The market faced some early pressure after its higher start, but support was found once the 10-yr note approached its unchanged level while the long bond briefly turned lower in the late morning. However, that move was followed by a push to fresh highs in the 10-yr note and shorter tenors while the long bond finished just below its starting level, but above its intraday low. The market received a big batch of economic data, which reflected some weakening in the labor market, as the ADP Employment Change report showed below-consensus job growth in August (54,000; Briefing.com consensus 69,000) while the ISM Services report for August (52.0%; Briefing.com consensus 50.5%) showed an acceleration in activity but the Employment Index (46.5) remained in contraction for the third month in a row. The market will receive more information on the subject tomorrow in the form of the Employment Situation Report from the Bureau of Labor Statistics. Today's advance sent the 10-yr yield to its lowest level since early May while the 2-yr yield finished at a level not seen in nearly a year. Crude oil added to yesterday's loss while the U.S. Dollar index rose 0.2% to 98.35.
• Yield Check:
  • 2-yr: -2 bps to 3.59%
  • 3-yr: -3 bps to 3.55%
  • 5-yr: -3 bps to 3.65%
  • 10-yr: -4 bps to 4.18%
  • 30-yr: -2 bps to 4.87%

• News:
  • The Atlanta Fed's GDPNow forecast for Q3 GDP was left unrevised at 3.0% in the latest update.
  • The Department of Justice opened a criminal investigation into Fed Governor Cook's alleged mortgage fraud.
  • Japan's Ministry of Finance said that current budget requests for next fiscal year are up about 6.3% year-over-year.
  • China is considering implementing new restrictions on stock speculation after China's market reached its best level in a decade.
  • The Bank of England's Decision Maker Panel raised its year-ahead CPI outlook to 3.3% from 3.2% while the three-year outlook was increased to 2.9% from 2.8%.
  • Germany's ifo Institute lowered its domestic growth forecast for 2025 to 0.2% from 0.3% while the outlook for 2026 was reduced to 1.3% from 1.5%.
  • South Korea's July Current Account surplus reached $10.78 bln (last surplus of $14.27 bln).
  • Australia's July trade surplus reached AUD7.31 bln (expected surplus of AUD4.88 bln; last surplus of AUD5.37 bln) as imports fell 1.3% m/m (last -1.5%) and exports rose 3.3% m/m (last 6.3%).
  • Eurozone's July Retail Sales were down 0.5% m/m (expected -0.3%; last 0.6%) but up 2.2% yr/yr (expected 2.4%; last 3.5%).
  • Swiss August CPI was down 0.1% m/m (expected 0.0%; last 0.0%) but up 0.2% yr/yr, as expected (last 0.2%). August Unemployment Rate remained at 2.9%, as expected.
• Today's Data:
  • The ADP Employment Change for August was 54,000 (Briefing.com consensus: 69,000) versus an upwardly revised 106,000 (from 104,000) in June. The goods-producing sector saw an increase of 13,000 positions, while the service-providing sector saw an increase of 42,000 positions. The change by establishment size was modest across the board: small (+12,000), medium (+25,000), and large (+18,000).
    • The key takeaway from the report is that it reflects a labor market that has weakened but which is not weak per se; nonetheless, this modest change will reinforce the market's rate-cut belief.
  • The ISM Services PMI increased to 52.0% in August (Briefing.com consensus 50.5%) from 50.1% in July. The dividing line between expansion and contraction is 50.0%, so the August reading reflects services sector activity expanding at a faster pace versus the prior month.
    • The key takeaway from the report is that it is a mixed bag for policymakers, featuring faster growth overall but an ongoing contraction in employment and a continuation of price pressures for services organizations.
  • Initial jobless claims for the week ending August 30 increased by 8,000 to 237,000 (Briefing.com consensus: 232,000). Continuing jobless claims for the week ending August 23 decreased by 4,000 to 1.940 million.
    • The key takeaway from the report is that there still isn't a strong weakening message being delivered by initial jobless claims, which were up from the prior week but still remain relatively low on a historical basis.
  • Q2 productivity was revised up to 3.3% (Briefing.com consensus: 2.4%) from the advance estimate of 2.4%. Q2 unit labor costs were revised down to 1.0% (Briefing.com consensus: 1.6%) from the advance estimate of 1.6%.
    • The key takeaway from the report is that it hit a sweet spot of signalling stronger productivity growth and a modest increase in unit labor costs.
  • The July trade deficit widened to $78.3 billion (Briefing.com consensus: -$64.2 billion) from an upwardly revised $59.1 billion (from -$60.2 billion), with exports being $0.8 billion more than June exports and imports being $20.0 billion more than June imports.
    • The key takeaway from the report is that the surge in imports reflects an easing of some of the tariff pressures that had been applied by the announcement of higher reciprocal rates. The downside, however, is that the net export component will be a negative component in the calculation of Q3 GDP.
  • The S&P Global U.S. Services PMI hit 54.5 in the final reading for August, down from the preliminary reading of 55.4 and July's final reading of 55.7.
  • Weekly crude oil inventories increased by 2.42 million barrels after decreasing by 2.39 million barrels a week ago.
  • Weekly natural gas inventories increased by 55 bcf after increasing by 18 bcf a week ago.
• Commodities:
  • WTI crude: -0.8% to $63.46/bbl
  • Gold: -0.8% to $3607.20/ozt
  • Copper: -1.5% to $4.56/lb
• Currencies:
  • EUR/USD: -0.1% to 1.1649
  • GBP/USD: -0.1% to 1.3430
  • USD/CNH: UNCH at 7.1390
  • USD/JPY: +0.3% to 148.51
• The Day Ahead:
  • 8:30 ET: August Nonfarm Payrolls (Briefing.com consensus 78,000; prior 73,000), Nonfarm Private Payrolls (Briefing.com consensus 90,000; prior 83,000), Unemployment Rate (Briefing.com consensus 4.3%; prior 4.2%), Average Hourly Earnings (Briefing.com consensus 0.3%; prior 0.3%), and Average Workweek (Briefing.com consensus 34.3; prior 34.3)