Bond Market Update

Bull-Steepener

• U.S. Treasuries had a solid showing today, primarily shorter-dated securities, which were bolstered by a market-friendly PPI reading this morning that kept rate-hike concerns for the July FOMC meeting in check. That got the ball rolling, so to speak, on buying efforts, which were quiet overnight as China posted some mixed data for June and oil prices rose on mutual strikes and threats by the U.S. and Iran. Oil prices eventually moderated, providing more cover for the Treasury market to engage in a bull-steepener trade that was aided by New York Fed President Williams' (FOMC voter) view that there are encouraging reasons to think inflation has peaked. Fed Governor Cook (FOMC voter), however, later asserted that if there are no signs of disinflation soon, then she would be prepared to act (i.e., vote for tighter monetary policy). Fed Governor Warsh, for his part, finished his semi-annual monetary policy report in front of the Senate Banking Committee today, but there were no revelations during his appearance that moved the market.
• Yield Check:
  • 2-yr: -6 bps to 4.13%
  • 3-yr: -6 bps to 4.18%
  • 5-yr: -6 bps to 4.26%
  • 10-yr: -4 bps to 4.55%
  • 30-yr: -1 bp to 5.08%

• News:
  • President Trump held a White House Situation Room meeting to discuss a massive offensive in Iran that will be wider in scope than the previous strikes this week. In a separate interview, President Trump threatened to strike Iranian power plants next week unless they return to the negotiating table. Axios
  • Iran threatens to block more energy shipping routes as it continues to attack Gulf area nations. Reuters
  • New York Fed President Williams (FOMC voter) says there are encouraging reasons to think inflation has peaked
  • Fed Governor Lisa Cook (FOMC voter) says, "If we do not see signs of disinflation soon, I am prepared to act"
  • Fed's Beige Book reports economic activity increased at a slight to moderate pace in eleven of twelve Federal Reserve Districts in late May and June, while one District reported no change.
  • The House committee could vote on a reconciliation resolution Thursday, which includes $67 bln for defense, $20 billion in farm aid, and various voting reforms. Politico
  • House passes daylight savings legislation, according to NBC News
  • South Korean President Lee remarked that the South Korean stock market is "quite unstable."
  • U.S. considering options for military action against Cuba, according to CBS News
  • China's June Retail Sales 1.0% yr/yr (-0.1% expected; prior -0.6%); June Industrial Production 5.3% yr/yr (4.7% expected; prior 4.5%); June Fixed Asset Investment -5.7% yr/yr (-5.0% expected; prior -4.1%); Q2 GDP 0.9% qtr/qtr (0.9% expected; prior 1.3%) and 4.7% year-to-date (4.5% expected; prior 5.0%); June House Prices -3.3% yr/yr (prior -3.5%); June Unemployment Rate 5.0% (5.1% expected; prior 5.1%); June New Loans CNY1610.0 bln (CNY1950.0 bln expected; prior CNY520.0 bln)
• Today's Data:
  • Total PPI decreased 0.3% month-over-month in June (Briefing.com consensus: 0.1%) following a downwardly revised 0.6% increase (from 1.1%) in May. The June drop was driven by a 1.4% decline in prices for final demand goods, which was paced by a 6.4% decline in prices for final demand energy. Core PPI, which excludes food and energy, was up 0.2% month-over-month (Briefing.com consensus: 0.4%) following a downwardly revised 0.1% increase (from 0.4%) in May. On a year-over-year basis, total PPI was up 5.5% versus 6.0% in May, and core PPI was up 4.7% versus 4.6% in May.
    • The key takeaway from the report is that it is an encouraging monthly marker of how the inflation data can improve with a decline in energy prices; however, it also reveals on a year-over-year basis that wholesalers are still dealing with high prices. Net-net, this report conveys the need for more improvement in bringing down wholesale prices, but it was better-than-feared when also factoring in the downward revisions to the prior month.
  • July Empire Manufacturing 15.6 (prior 5.7), with the new orders index up 18.7 points to 22.2 and the prices paid index down 8.7 points to 52.3.
  • MBA Mortgage Applications Index -2.7% wk/wk (prior -2.2%)
• Commodities:
  • WTI crude: +0.3% to $79.62/bbl
  • Gold: -0.3% to $4057.50/ozt
  • Copper: -0.3% to $6.36/lb
• Currencies:
  • EUR/USD:+0.5% to 1.1472
  • GBP/USD: +1.1% to 1.3543
  • USD/CNH: -0.1% to 6.7670
  • USD/JPY: -0.1% to 162.02
• The Day Ahead:
  • 08:30 ET: July Philadelphia Fed Index (Briefing.com consensus: 11.0; prior 10.3)
  • 08:30 ET: June Retail Sales (Briefing.com consensus: 0.3%; prior 0.9%) and Retail Sales, Ex-Auto (Briefing.com consensus: 0.1%; prior 0.8%)
  • 08:30 ET: Weekly Initial Claims (Briefing.com consensus: 219K; prior 215K) and Continuing Jobless Claims (prior 1814K)
  • 10:00 ET: May Business Inventories (Briefing.com consensus: 0.3%; prior 0.5%)
  • 10:00 ET: July NAHB Housing Market Index (Briefing.com consensus: 37; prior 35)
  • 10:00 ET: June Pending Home Sales (Briefing.com consensus: 0.4%; prior 3.8%)
  • 10:30 ET: EIA Natural Gas Inventories (prior +61 bcf)