Bond Market Update

July Losses Extended

• U.S. Treasuries finished the week and the month on a sharply lower note, sending yields on 10s and 30s to fresh highs for the year while shorter tenors avoided the same fate by a slim margin. The start of the session saw relative weakness in shorter tenors after yesterday's outperformance, but it wasn't long before selling pressure built in longer tenors, keeping their yields on an upward path into the afternoon while the 2-yr yield reached its session high in morning trade, showing some relative resilience into the close that kept it in a sideways range. This week's outperformance in the 2-yr note resulted in some notable steepening, as the 2s10s spread expanded by 11 basis points to 46 bps. The equity market remained in overall focus as stocks gave back their starting gains but fought to recover them as the day went on, serving as a prime example of the recent skittishness in sentiment. Crude oil climbed toward $85/bbl, adding more than $15/bbl for the month, while the U.S. Dollar Index spent the day near its unchanged level at 99.86. The Index lost 1.2% this month with a good chunk of that loss coming in the past two days after Japan's Ministry of Finance conducted a joint intervention with South Korea's authorities and the U.S. Treasury to boost the yen off its lowest level against the dollar in nearly 30 years.
• Yield Check:
  • 2-yr: +6 bps to 4.29% (-4 bps this week; +15 bps in July)
  • 3-yr: +8 bps to 4.36% (UNCH this week; +22 bps in July)
  • 5-yr: +9 bps to 4.46% (+3 bps this week; +27 bps in July)
  • 10-yr: +8 bps to 4.75% (+7 bps this week; +33 bps in July)
  • 30-yr: +7 bps to 5.28% (+12 bps this week; +38 bps in July)

• News:
  • The Bank of Japan left its policy rate at 1.00%, as expected, noting that risks to prices remain skewed to the upside.
  • China is expected to accelerate government spending during the second half of the year.
  • China's July Manufacturing PMI hit 49.2 (expected 50.1; last 50.3) and July Non-Manufacturing PMI hit 49.0 (expected 50.0; last 50.2).
  • Japan's July Tokyo CPI was up 2.0% yr/yr (last 1.7%) and Tokyo Core CPI was up 1.9% yr/yr (expected 1.8%; last 1.6%). June Retail Sales rose 0.5% yr/yr (expected 3.1%; last 5.0%) and June Industrial Production was up 1.3% m/m (expected 1.0%; last 0.1%). June Housing Starts rose 18.6% yr/yr (expected 12.7%; last 33.9%) and Construction Orders were up 2.3% yr/yr (last -6.7%).
  • South Korea's June Retail Sales rose 2.7% m/m (last 0.1%), June Industrial Production was up 6.4% m/m (expected 3.0%; last -2.9%), rising 5.8% yr/yr (expected 2.5%; last -1.1%). June Service Sector Output was up 0.7% m/m (last 1.0%).
  • Hong Kong's Q2 GDP contracted 0.6% qtr/qtr (expected -0.3%; last 2.9%) but was up 4.3% yr/yr (expected 4.8%; last 5.9%).
  • Australia's Q2 PPI was up 1.3% qtr/qtr (expected 0.5%; last 0.4%), rising 3.6% yr/yr (last 3.0%). June Private Sector Credit was up 0.8% m/m (expected 0.6%; last 0.7%) and June Housing Credit was up 0.6% m/m (last 0.6%).
  • Singapore's July Bank Lending reached SGD931.4 bln (last SGD917.7 bln). Q2 Unemployment Rate remained at 2.0% and Q2 Business Expectations fell to 12.00 from 17.00.
  • Eurozone's flash July CPI was up 2.8% m/m (last -0.1%), rising 2.9% yr/yr, as expected (last 2.8%). Flash July Core CPI was unchanged m/m (last 0.2%), rising 2.5% yr/yr (expected 2.4%; last 2.4%).
  • Germany's July Unemployment increased by 6,000 (expected 5,000; last -1,000) and Unemployment Rate rose to 6.4% from 6.3% (expected 6.3%).
  • U.K.'s July Nationwide HPI was up 0.1% m/m, as expected (last 0.0%), rising 1.8% yr/yr (expected 1.9%; last 2.2%).
  • France's flash July CPI was up 0.6% m/m (expected 0.3%; last -0.3%), rising 2.1% yr/yr (last 1.8%). June PPI was down 0.6% m/m (last -0.2%) but up 2.6% yr/yr (last 3.1%).
  • Italy's July Business Confidence rose to 89.6 from 88.6 (expected 88.9) and Consumer Confidence rose to 94.2 from 92.4 (expected 92.5). Flash July CPI was up 0.2% m/m (expected 0.3%; last 0.0%), rising 2.8% yr/yr, as expected (last 3.0%).
  • Spain's May Current Account surplus reached EUR1.84 bln (last EUR1.88 bln).
  • Swiss June Retail Sales rose 1.5% yr/yr (expected 3.1%; last 3.4%).
• Today's Data:
  • The Q2 Employment Cost Index increased 0.9% (Briefing.com consensus: 0.8%) on the heels of a 0.9% increase in Q1, with wages and salaries up 0.9% and benefit costs up 1.0%.
    • The key takeaway from the report is that wages and salaries for civilian workers, up 3.2% year-over-year, are not keeping up with inflation. That could eventually lead to reduced discretionary spending activity.
  • The Chicago PMI hit 57.6 in July (Briefing.com consensus 56.5), up from 56.7 in June.
  • The final reading for the University of Michigan Consumer Sentiment Index for July increased to 55.2 (Briefing.com consensus: 54.4) from the preliminary reading of 54.4 and the final reading of 49.5 for June. In the same period a year ago, the index stood at 61.7.
    • The key takeaway from the report is that sentiment held okay in July, even as gas prices started to rise again amid increased military hostilities between the U.S. and Iran.
• Commodities:
  • WTI crude: +1.2% to $84.57/bbl
  • Gold: -1.3% to $4106.60/ozt
  • Copper: -0.2% to $6.47/lb
• Currencies:
  • EUR/USD: +0.1% to 1.1532
  • GBP/USD: +0.2% to 1.3484
  • USD/CNH: +0.1% to 6.7526
  • USD/JPY: -0.4% to 158.95
• The Week Ahead:
  • Monday: Final July S&P Global U.S. Manufacturing PMI (prior 53.8) at 9:45 ET; June Construction Spending (Briefing.com consensus 0.3%; prior 0.1%) and July ISM Manufacturing Index (Briefing.com consensus 54.0%; prior 53.3%) at 10:00 ET
  • Tuesday: June Trade Balance (Briefing.com consensus -$73.0 bln; prior -$77.6 bln) at 8:30 ET; June Factory Orders (Briefing.com consensus 0.2%; prior -1.3%) and June job openings (prior 7.594 mln) at 10:00 ET
  • Wednesday: Weekly MBA Mortgage Index (prior -6.4%) at 7:00 ET; July ADP Employment Change (Briefing.com consensus 75,000; prior 98,000) at 8:15 ET; final July S&P Global U.S. Services PMI (prior 53.6) at 9:45 ET; July ISM Non-Manufacturing Index (Briefing.com consensus 54.7%; prior 54.0%) at 10:00 ET; and weekly crude oil inventories (prior -7.17 mln) at 10:30 ET
  • Thursday: Preliminary Q2 Productivity (Briefing.com consensus 0.8%; prior 0.3%) and preliminary Q2 Unit Labor Costs (Briefing.com consensus 1.7%; prior 1.8%), weekly Initial Claims (Briefing.com consensus 200,000; prior 197,000), and Continuing Claims (prior 1.782 mln) at 8:30 ET; June Wholesale Inventories (Briefing.com consensus 0.3%; prior 0.3%) at 10:00 ET; and weekly natural gas inventories (prior +28 bcf) at 10:30 ET
  • Friday: July Nonfarm Payrolls (Briefing.com consensus 86,000; prior 57,000), Nonfarm Private Payrolls (Briefing.com consensus 69,000; prior 49,000), Unemployment Rate (Briefing.com consensus 4.2%; prior 4.2%), Average Hourly Earnings (Briefing.com consensus 0.3%; prior 0.3%), and Average Workweek (Briefing.com consensus 34.3; prior 34.3) at 8:30 ET; and June Consumer Credit (Briefing.com consensus $9.0 bln; prior -$0.2 bln) at 15:00 ET