Bond Market Update

Eye on Market-Friendly PPI

• U.S. Treasuries took some solace in a July PPI report that reinforced the belief coming out of the July CPI report that the Fed won't be raising rates at its September FOMC meeting. Like the CPI report, the PPI report showed some welcome disinflation on a year-over-year basis that many assumed would convince Fed officials to maintain a wait-and-see stance. The fed funds futures market, which showed a 40.6% probability of a 25-basis point hike at the September FOMC meeting just before the 8:30 a.m. ET release, now pegs such a probability at 34.6%, according to the CME FedWatch Tool. The front end of the curve responded favorably to the recalibrated position and led today's gains. A 2.6% drop in WTI crude futures to $81.06/bbl lent some added support across the curve, which also digested a $25 billion 30-yr bond auction that was met with average demand.
• Yield Check:
  • 2-yr: -6 bps to 4.14%
  • 3-yr: -6 bps to 4.21%
  • 5-yr: -5 bps to 4.32%
  • 10-yr: -4 bps to 4.64%
  • 30-yr: -4 bps to 5.21%

• News:
  • The Trump administration will rely on economic sanctions and the naval blockade to hurt Iran economically. Bloomberg
  • Sky News Arabia says, "The Houthis say they targeted Aramco's refinery in Saudi Arabia's Jazan region with two drones"
  • Japan's government will support a faster rate increase from the Bank of Japan. Bloomberg
  • Mexico wants lower auto tariffs amid trade talks. WSJ
  • Republican states rolling back property taxes. WSJ
  • The Norges Bank left its key policy rate unchanged at 4.25% but suggested it may need to raise rates again.
  • Market pricing continues to suggest a BOJ rate hike could happen in either September or October
  • U.K.'s June GDP 0.3% m/m (expected 0.0%; prior 0.0%) and 1.1% yr/yr (expected 0.8%; prior 1.2%), Q2 GDP 0.4% qtr/qtr (expected 0.4%; prior 0.6%) and 1.2% yr/yr (expected 1.1%; prior 0.9%)
• Today's Data:
  • Total PPI was unchanged month-over-month in July (Briefing.com consensus: 0.1%) following an upwardly revised 0.1% decline (from -0.3%) in June. Core PPI, which excludes food and energy, increased 0.2% month-over-month (Briefing.com consensus: 0.3%) following an upwardly revised 0.4% increase (from 0.2%) in June.Total PPI was up 4.7% year-over-year, down from 5.5% in June. Core PPI was up 4.2% year-over-year versus 4.7% in June.
    • The key takeaway from the report is that, like the CPI, it was devoid of "new" inflation-baked surprises. Headline and core readings trended in the right direction of disinflation, which is an appeasement for today's trading dynamic, but of course the inflation rates themselves remain on the high side and need to come down much more to appease inflation hawks.
  • Initial jobless claims for the week ending August 8 increased by 9,000 to 209,000 (Briefing.com consensus: 205,000). Continuing jobless claims for the week ending August 1 decreased by 22,000 to 1.777 million.
    • The key takeaway from the report is the 4-week moving average for initial claims running below 200,000 (currently 199,000), which is an historically low number consistent with a labor market that is light on layoff activity.
  • The 30-yr bond auction saw a high yield of 5.216% slightly tail the when-issued yield of 5.212%. Overall, it was an average auction. The 2.39 bid-to-cover ratio was right in-line with the prior 12 auction average.
• Commodities:
  • WTI crude: -2.6% to $81.06/bbl
  • Gold: -1.0% to $4420.50/ozt
  • Copper: unch at $6.61/lb
• Currencies:
  • EUR/USD: flat at 1.1527
  • GBP/USD: -0.1% to 1.3482
  • USD/CNH: flat at 6.7451
  • USD/JPY: +0.1% to 159.52
• The Day Ahead:
  • 08:30 ET: July Retail Sales (Briefing.com consensus: 0.2%; prior 0.2%) and Retail Sales, Ex-Auto (Briefing.com consensus: 0.2%; prior -0.2%)
  • 10:00 ET: June Business Inventories (Briefing.com consensus: 0.1%; prior 0.3%)
  • 10:00 ET: Preliminary August Univ. of Michigan Consumer Sentiment (Briefing.com consensus: 54.5; prior 55.2)