Bond Market Update

Long Bond Watch Resumes

• U.S. Treasuries had a mixed showing on Thursday, as the 2-yr note continued building on its rebound off its lowest level of the year while longer tenors retreated with relative weakness in the long bond sending its yield to a fresh high for the year. Long bond futures retreated after yesterday's cash close as investors continued responding to Fed Chairman Warsh's press conference, during which he repeated that wants to see markets respond to changes in the economy rather than changes in policy expectations. The bulk of today's selling in the cash market took place at the open, though the long bond extended its loss as the day went on while shorter tenors finished a bit above their starting levels with the 2-yr note recording its fifth consecutive gain. However, with the 30-yr yield settling at its highest level in 19 years, the long bond is sure to be closely watched in the coming days and weeks for potential follow-through selling. Today's sharply lower start masked the release of the advance GDP report for Q2 (1.5%; Briefing.com consensus 2.3%), which missed headline expectations, but still contained some solid elements, and the Personal Income/Outlays report for June, which showed a small deceleration in the year-over-year core PCE rate (to 3.3% from 3.4%). Elsewhere, the eurozone's flash GDP for Q2 (0.4% qtr/qtr; expected 0.2%; last -0.2%) exceeded expectations thanks to above-consensus growth in Germany, Italy, and Spain. Crude oil stayed below $85/bbl while the U.S. Dollar Index fell 1.0% to 99.93.
• Yield Check:
  • 2-yr: -1 bp to 4.23%
  • 3-yr: UNCH at 4.28%
  • 5-yr: +2 bps to 4.38%
  • 10-yr: +4 bps to 4.66%
  • 30-yr: +7 bps to 5.21%

• News:
  • Japan's cabinet lowered its domestic growth forecast for FY26 to 0.9% from 1.3% and raised the CPI outlook to 2.2% from 1.9%.
  • The Bank of Japan will release its latest policy Statement overnight, but a hike is not expected at this time.
  • Japan's Prime Minister Takaichi ordered the lowering of the food sales tax to 1% from 8%, starting in April, as expected.
  • The Hong Kong Monetary Authority kept its policy rate at 4.00%, following in the footsteps of the Fed.
  • The Bank of England voted 6-3 to hold its bank rate at 3.75%.
  • Japan's July Household Confidence rose to 34.9 from 33.8 (expected 34.2; last 33.8).
  • Australia's June Building Approvals were up 7.2% m/m (expected -0.7%; last -1.6%), rising 8.9% yr/yr (last 5.5%). Q2 Import Price Index was up 5.7% qtr/qtr (expected 0.0%; last 0.1%) and Export Price Index was up 1.1% qtr/qtr (last 0.5%).
  • New Zealand's July ANZ Business Confidence rose to 56.1 from 36.6.
  • Eurozone's Q2 GDP expanded 0.4% qtr/qtr (expected 0.2%; last -0.2%), growing 1.0% yr/yr (expected 0.5%; last 0.3%). June Unemployment Rate remained at 6.3% (expected 6.2%). July Business and Consumer Survey rose to 96.9 from 95.4 (expected 96.0).
  • Germany's Q2 GDP expanded 0.2% qtr/qtr (expected 0.1%; last 0.3%), growing 0.9% yr/yr (expected 0.6%; last 0.4%). Flash July CPI was up 0.8% m/m (expected 0.7%; prior -0.3%), rising 2.8% yr/yr (expected 2.7%; last 2.3%).
  • France's Q2 GDP expanded 0.2% qtr/qtr, as expected (last -0.1%), growing 0.7% yr/yr (expected 0.8%; last 0.8%). June Consumer Spending was up 0.4% m/m (expected -0.1%; last 0.3%) and Q2 nonfarm payrolls decreased 0.1% qtr/qtr, as expected (last 0.0%).
  • Italy's Q2 GDP expanded 0.2% qtr/qtr (expected 0.1%; last 0.3%), growing 1.0% yr/yr (expected 0.7%; last 0.8%). June Unemployment Rate rose to 5.7% from 5.3% (expected 5.0%).
  • Spain's Q2 GDP expanded 0.7% qtr/qtr (expected 0.6%; last 0.6%), growing 2.7% yr/yr (expected 2.5%; last 2.7%). July CPI was up 0.2% m/m, as expected (last 0.6%), rising 3.0% yr/yr (last 2.9%).
  • Swiss July KOF Leading Indicators rose to 103.5 from 102.1 (expected 100.9).
• Today's Data:
  • The Advance Q2 GDP report showed real GDP increasing at an annual rate of 1.5% (Briefing.com consensus: 2.3%) on the heels of a 2.1% increase for Q1. The GDP Price Index increased by a whopping 6.3% (Briefing.com consensus: 3.7%) following a 3.6% increase in Q1.
    • While the headline GDP print is a bit disappointing, it is not as soft as it appears knowing that net exports subtracted 1.01 percentage points. The bright spot was the pickup seen in personal spending (+3.2% from +0.5%) and final sales to private domestic purchasers (+3.9% from +1.7%).
  • Initial jobless claims for the week ending July 25 increased by 9,000 to 197,000 (Briefing.com consensus: 203,000). Continuing jobless claims for the week ending July 18 decreased by 7,000 to 1.782 million.
    • The key takeaway from the report is initial claims remaining below 200,000, which is an historically low level and indicative of a solid labor market where layoff activity is quite low.
  • Personal income increased 0.2% month-over-month in June (Briefing.com consensus: 0.3%), personal spending jumped 0.3% (Briefing.com consensus: 0.4%), the PCE Price Index was down 0.1% (Briefing.com consensus: -0.1%), and the core-PCE Price Index rose 0.1% (Briefing.com consensus: 0.2%). On a year-over-year basis, the PCE Price Index was up 3.7% versus 4.1% in May, and the core-PCE Price Index was up 3.3% versus 3.4% in June.
    • The key takeaway from the report, taking into account Fed Chair Warsh's demonstrative statement that the Fed doesn't have a soft inflation target but a hard target of 2.0%, is that the PCE Price Index remains well above 2.0%.
  • Weekly natural gas inventories increased by 28 bcf after increasing by 32 bcf a week ago.
• Commodities:
  • WTI crude: -1.1% to $83.56/bbl
  • Gold: +3.1% to $4160.80/ozt
  • Copper: +2.7% to $6.48/lb
• Currencies:
  • EUR/USD: +0.7% to 1.1534
  • GBP/USD: +0.9% to 1.3476
  • USD/CNH: -0.2% to 6.7464
  • USD/JPY: -2.6% to 159.08
• The Day Ahead:
  • 8:30 ET: Q2 Employment Cost Index (Briefing.com consensus 0.8%; prior 0.9%) 
  • 9:45 ET: July Chicago PMI (Briefing.com consensus 56.5; prior 56.7)
  • 10:00 ET: Final July University of Michigan Consumer Sentiment (Briefing.com consensus 54.4; prior 54.4)