Bond Market Update

A Tale of Two Markets

• U.S. Treasuries had the best of times and the worst of times today. Ultimately, they finished with a nod to the best of times, with yields settling near their lows for the day even though oil prices traded higher. The 10-yr note yield hit 5.34% overnight, fell back to 5.27% shortly before the release of a trove of economic data today that could generally be deemed as providing good economic news, and then went back to retest 5.34%, where it was again met with resistance. The failure there induced some short-covering activity that took the 10-yr note yield down to 5.21%. The front end saw some similar action, with the 2-yr swinging from 4.92% overnight to as low as 4.75% in the cash trade. Notwithstanding an elevated Prices Paid Index in the September ISM Manufacturing Index, the probability of a 25-basis-point rate hike at the October FOMC meeting was reduced to 23.8% from 37.6% a day ago. Fed Governor Jefferson (FOMC), like New York Fed President Williams (FOMC voter), suggested a decision on any future policy adjustments "may take more time." The U.S. Dollar Index was up 0.6% to 102.06.
• Yield Check:
  • 2-yr: -10 bps to 4.79%
  • 3-yr: -9 bps to 4.91%
  • 5-yr: -8 bps to 5.01%
  • 10-yr: -6 bps to 5.24%
  • 30-yr: -4 bps to 5.60%

• News:
  • China considers targeted fiscal support. Bloomberg
  • President Trump told reporters that Jerome Powell should resign from the Fed board. Bloomberg
  • Iran offering to restore access of nuclear inspectors if sanctions are eased, according to Bloomberg
  • Senate confirms Keith Sonderling as Secretary of Labor. Congress is now on recess until after the midterm elections. Washington Post
  • Fed Vice Chair Phillip Jefferson (FOMC voter) says, "My colleagues and I will need to come to our own judgment, which may take more time."
  • Boston Fed President Susan Collins (non-FOMC voter) says monetary policy can focus on reaching Fed's 2% inflation goal; says labor market near full employment but inflation is too high. CNBC
  • Chinese refiners suspended October fuel exports. Reuters
  • Israel's Channel 12 News reporting "U.S. Army Sending Third Aircraft Carrier and Second Marine Unit to the Middle East"
  • President Trump says if Iran is responsible for the incident on the Flydubai aircraft, "they will be hit very hard"
  • The Trump administration is telling European governments to release diesel from their own strategic reserves or face an export ban. Reuters
  • Class 8 used retail truck sales declined 24%. Act Research
  • U.S. slowing aircraft part exports to China to gain leverage in trade talks. Reuters
  • South Korea unveils $22.3 bln Texas gas power project to support AI data centers, according to Reuters
  • Eurozone's September HCOB Manufacturing PMI 52.9 (expected 52.7; prior 52.7)
• Today's Data:
  • September S&P Global U.S. Manufacturing PMI - Final (Actual 55.9; Briefing.com consensus: 55.3; prior 57.0)
  • For the week ending September 26, initial jobless claims fell by 1,000 to 197,000 (Briefing.com consensus: 200,000). Continuing jobless claims for the week ending September 19 decreased by 11,000 to 1.701 million.
    • The key takeaway from the report remains the same: layoff activity continues to run at low levels that reflect a solid demand environment.
  • Construction spending increased 0.9% month-over-month in August (Briefing.com consensus: 0.3%) following a 0.1% decline in July. On a year-over-year basis, construction spending was down 1.7%.
    • The key takeaway from the report was the strength seen in private construction, which included solid increases for both residential and nonresidential spending.
  • The ISM Manufacturing Index decreased to 54.5% in September (Briefing.com consensus: 55.2%) from 54.6% in August. The dividing line between expansion and contraction is 50.0%, so the September figure suggests manufacturing activity expanded in September from the prior month but at a slightly slower pace.
    • The key takeaway from the report is that it showed an ongoing expansion in manufacturing activity that was accompanied by a faster acceleration in prices paid, which will continue to foment concerns about pass-through effects for customers.
• Commodities:
  • WTI crude: +2.7% to $93.02/bbl
  • Gold: +0.6% to $4,211.20/ozt
  • Copper: -0.5% to $6.58/lb
• Currencies:
  • EUR/USD: -0.9% to 1.1229
  • GBP/USD: -0.6% to 1.3190
  • USD/CNH: +0.1% to 6.7161
  • USD/JPY: +0.4% to 158.07
• The Day Ahead:
  • 08:30 ET: September Nonfarm Payrolls (Briefing.com consensus: 100K; prior 162K); Nonfarm Private Payrolls (Briefing.com consensus: 100K; prior 127K); Unemployment Rate (Briefing.com consensus: 4.1%; prior 4.1%); Average Hourly Earnings (Briefing.com consensus: 0.3%; prior 0.3%); and Average Workweek (Briefing.com consensus: 34.3; prior 34.4)
  • 10:00 ET: August Factory orders (Briefing.com consensus: 0.0%; prior 0.9%)
  • 10:00 ET: Dallas Fed President Logan (FOMC voter)