Bond Market Update

Rate Cut Hopes Send 2-Yr Yield to Three-Year Closing Low

• U.S. Treasuries finished the week on a strong note after a disappointing Employment Situation report for August (22,000; Briefing.com consensus 78,000) invited concerns about the strength of economic growth in the near future and caused the market to reconsider the likelihood of a 50-basis point rate cut on September 17. The trading day started in quiet fashion as the market awaited the August jobs report, with Treasuries soaring to highs during the 40 minutes that followed the 8:30 ET release. In addition to showing a slowdown in hiring, the report revealed more pressure on average hourly earnings growth with the year-over-year growth rate falling to 3.7% from 3.9% in July. Longer tenors were at the forefront of the post-data buying, though even with today's outperformance, the 30-yr yield settled at a one-month low while the 10-yr yield finished at level last seen in early April. Up front, the 2-yr yield recorded its lowest close in three years as the market's expectations for a 25-basis point rate cut were cemented while the implied likelihood of a 50-basis point decrease grew to 9.8% from yesterday's 0.0%. The growth concerns sent crude oil to its lowest level since late May while the U.S. Dollar Index fell 0.6% to 97.74, sliding past its 50-day moving average (98.05) back to little changed for the week.
• Yield Check:
  • 2-yr: -8 bps to 3.51% (-11 bps this week)
  • 3-yr: -7 bps to 3.48% (-11 bps this week)
  • 5-yr: -7 bps to 3.58% (-12 bps this week)
  • 10-yr: -9 bps to 4.09% (-14 bps this week)
  • 30-yr: -10 bps to 4.78% (-14 bps this week)

• News:
  • Chicago Fed President (FOMC voter) Goolsbee said that he has not made up his mind about a September rate cut, according to Bloomberg.
  • China will implement a 78% tariff on imports of U.S. fiber optic products, according to Caixin.
  • China Securities Journal speculated that the People's Bank of China will inject liquidity into money markets this month.
  • The European Central Bank will meet next week, but another rate cut is not expected until later in the year.
  • French Prime Minister Bayrou will face a confidence vote on Monday.
  • Japan's July Household Spending rose 1.7% m/m (expected 1.3%; last -5.2%), increasing 1.4% yr/yr (expected 2.2%; last 1.3%). July Overall Wage Income was up 4.1% yr/yr (expected 3.0%; last 3.1%) and Overtime Pay was up 3.3% yr/yr (last 0.5%). July Leading Index rose to 105.9 from 105.6 (expected 105.8) and Coincident Indicator was down 2.6% m/m (last 0.3%).
  • Singapore's July Retail Sales were up 4.1% m/m (last -1.1%), rising 4.8% yr/yr (last 2.4%).
  • Eurozone's Q2 GDP expanded 0.1% qtr/qtr, as expected (last 0.6%), growing 1.5% yr/yr (expected 1.4%; last 1.5%). Q2 Employment increased by 0.1% qtr/qtr, as expected (last 0.2%), rising 0.6% yr/yr (expected 0.7%; last 0.7%).
  • Germany's July Factory Orders were down 2.9% m/m (expected 0.5%; last -0.2%).
  • U.K.'s July Retail Sales rose 0.6% m/m (expected 0.3%; last 0.3%), increasing 1.1% yr/yr (expected 1.3%; last 0.9%). July Core Retail Sales were up 0.5% m/m (expected 0.4%; last 0.6%), rising 1.3% yr/yr (expected 1.2%; last 1.3%). August Halifax House Price Index was up 0.3% m/m (expected 0.2%; last 0.4%), rising 2.2% yr/yr (expected 2.0%; last 2.5%).
  • France's July trade deficit reached EUR5.6 bln (expected deficit of EUR7.3 bln; last deficit of EUR7.2 bln) and July Current Account deficit reached EUR2.50 bln (last deficit of EUR2.30 bln).
  • Italy's July Retail Sales were unchanged m/m (expected 0.2%; last 0.7%), rising 1.8% yr/yr (last 1.1%).
  • Swiss August SECO Consumer Climate fell to -40 from -33 (expected -37).
• Today's Data:
  • August nonfarm payrolls increased by 22,000 (Briefing.com consensus: 78,000). The 3-month average for total nonfarm payrolls increased to 29,000 from 28,000. July nonfarm payrolls revised to 79,000 from 73,000. June nonfarm payrolls revised to -13,000 from 14,000.
    • August private sector payrolls increased by 38,000 (Briefing.com consensus: 90,000). July private sector payrolls revised to 77,000 from 83,000. June private sector payrolls revised to -27,000 from 3,000.
    • August unemployment rate was 4.3% (Briefing.com consensus: 4.3%) versus 4.2% in July. Persons unemployed for 27 weeks or more accounted for 25.7% of the unemployed versus 24.9% in July. The U6 unemployment rate, which accounts for unemployed and underemployed workers, increased to 8.1% from 7.9% in July.
    • August average hourly earnings were up 0.3% (Briefing.com consensus: 0.3%) versus 0.3% in July. Over the last 12 months, average hourly earnings have risen 3.7% versus 3.9% for the 12 months ending in July.
    • The average workweek in August was 34.2 hours (Briefing.com consensus: 34.3) versus a downwardly revised 34.2 hours (from 34.3) in July. Manufacturing workweek edged down to 40.0 hours from 40.1 hours. Factory overtime was unchanged at 2.9 hours.
    • The labor force participation rate increased to 62.3% from 62.2% and the employment-population ratio held at 59.6%.
• Commodities:
  • WTI crude: -2.5% to $61.87/bbl
  • Gold: +1.3% to $3653.20/ozt
  • Copper: -0.1% to $4.55/lb
• Currencies:
  • EUR/USD: +0.6% to 1.1720
  • GBP/USD: +0.6% to 1.3508
  • USD/CNH: -0.2% to 7.1252
  • USD/JPY: -0.7% to 147.43
• The Week Ahead:
  • Monday: July Consumer Credit (Briefing.com consensus $10.5 bln; prior $7.4 bln) at 15:00 ET
  • Tuesday: $58 bln 3-yr Treasury note auction results at 13:00 ET
  • Wednesday: Weekly MBA Mortgage Index (prior -1.2%) at 7:00 ET; August PPI (Briefing.com consensus 0.3%; prior 0.9%) and Core PPI (Briefing.com consensus 0.3%; prior 0.9%) at 8:30 ET; July Wholesale Inventories (Briefing.com consensus 0.2%; prior 0.1%) at 10:00 ET; weekly crude oil inventories (prior +2.42 mln) at 10:30 ET; and $39 bln 10-yr Treasury note reopening results at 13:00 ET
  • Thursday: August CPI (Briefing.com consensus 0.3%; prior 0.2%) and Core CPI (Briefing.com consensus 0.3%; prior 0.3%), weekly Initial Claims (Briefing.com consensus 240,000; prior 237,000), and Continuing Claims (prior 1.940 mln) at 8:30 ET; weekly natural gas inventories (prior +55 bcf) at 10:30 ET; $22 bln 30-yr Treasury bond reopening result at 13:00 ET; and August Treasury Budget (prior -$291.1 bln) at 14:00 ET
  • Friday: Preliminary September University of Michigan Consumer Sentiment (Briefing.com consensus 59.2; prior 58.2) at 10:00 ET