Bond Market Update

Cool June CPI Lifts Shorter Tenors

• U.S. Treasuries rebounded from two days of losses on Wednesday with relative strength in shorter tenors pressuring their yields from highest settlement levels of the year while longer tenors lagged but still ended in positive territory. The trading day started in flat fashion after a night that featured selling in most other sovereign debt and relative strength in JGBs after Japan's Finance Minister Katayama again spoke in favor of including JGBs in a greater variety of basic investment products. The overnight data flow included a strong June trade balance reading from China, which showed a new monthly record in the dollar-denominated surplus. Treasuries followed their flat start with an immediate rally after the market received the CPI report for June, which showed headline deflation (-0.4%; Briefing.com consensus -0.2%) and a flat Core CPI reading (Briefing.com consensus 0.2%), that slowed the year-over-year CPI rate to 3.5% from 4.2% and the core rate to 2.6% from 2.9%. The post-data rally was tested immediately with the long bond eventually giving back all but a sliver of its post-CPI gain while shorter tenors held onto bigger portions of their gains. Fed Chairman Warsh made his first appearance at the semiannual testimony on monetary policy to Congress, but his remarks to the House Financial Services Committee were not surprising. He made it clear that he will not tolerate elevated inflation and said that the findings of the five task forces will not be kept secret. He will appear before the Senate Banking Committee tomorrow and is expected to deliver the same prepared remarks. Crude oil climbed toward $80/bbl while the U.S. Dollar Index fell 0.3% to 100.96.
• Yield Check:
  • 2-yr: -7 bps to 4.19%
  • 3-yr: -6 bps to 4.24%
  • 5-yr: -4 bps to 4.32%
  • 10-yr: -2 bps to 4.59%
  • 30-yr: UNCH at 5.09%

• News:
  • President Trump said that his plan to charge a toll for passage through the Strait of Hormuz will be replaced with investment commitments from Gulf nations. 
  • Bank of England Governor Bailey told the U.K. Treasury that risks to financial stability have increased.
  • Germany's Economy Ministry observed some stabilization in the German economy at the mid-year point.
  • Hapag-Lloyd raised its guidance for the year due to strong demand and high freight rates.
  • China's June trade surplus reached $125.62 bln (expected surplus of $119.50 bln; last surplus of $105.43 bln) as imports grew 36.0% yr/yr (expected 24.0%; last 27.4%) and exports jumped 27.0% yr/yr (expected 18.2%; last 19.4%).
  • Japan's May Industrial Production was up 0.1% m/m (expected 0.5%; last 0.5%) and Capacity Utilization was up 0.1% m/m (last -0.8%).
  • Australia's July Westpac Consumer Sentiment was up 4.1% (last -2.9%). June NAB Business Confidence rose to -5 from -14 and NAB Business Survey remained at 3.
  • New Zealand's Q2 NZIER Business Confidence rose to 8% from -4%.
  • India's June WPI Inflation was up 9.87% yr/yr (expected 9.15%; last 9.68%).
  • Germany's June WPI was down 0.7% m/m (expected 0.5%; last -0.6%) but up 4.9% yr/yr (last 5.9%).
  • Swiss June PPI was down 0.3% m/m (expected -0.5%; last -0.4%), falling 2.1% yr/yr (last -1.8%).
• Today's Data:
  • Total CPI was down 0.4% month-over-month in June (Briefing.com consensus: -0.1%), which was the largest one-month drop since April 2020. That move was paced by a 5.7% decline in the index for energy. Core CPI, which excludes food and energy, was unchanged month-over-month (Briefing.com consensus: 0.2%), leaving it up 2.6% year-over-year versus 2.9% in May. Total CPI was up 3.5% year-over-year versus 4.2% in May.
    • The key takeaway from the report is the softening in core inflation and the added softening in super core inflation, which excludes food, energy, and shelter. That component was up just 2.1% year-over-year. Inflation has not been slayed, but this report should be enough to keep the FOMC on hold at its July 28-29 meeting.
  • The NFIB Small Business Optimism Index hit 97.4 in June (Briefing.com consensus 95.6), up from 95.3 in May.
• Commodities:
  • WTI crude: +1.9% to $79.40/bbl
  • Gold: +1.6% to $4069.70/ozt
  • Copper: +1.6% to $6.38/lb
• Currencies:
  • EUR/USD: +0.4% to 1.1424
  • GBP/USD: +0.3% to 1.3383
  • USD/CNH: -0.2% to 6.7733
  • USD/JPY: -0.2% to 162.17
• The Day Ahead:
  • 7:00 ET: Weekly MBA Mortgage Index (prior -2.2%)
  • 8:30 ET: June PPI (Briefing.com consensus 0.1%; prior 1.1%), June Core PPI (Briefing.com consensus 0.4%; prior 0.4%), and July Empire State Manufacturing survey (Briefing.com consensus 8.5; prior 5.7)
  • 10:30 ET: Weekly crude oil inventories (prior +3.00 mln)
  • 14:00 ET: July Fed Beige Book