Bond Market Update

 Recent Gains Narrowed

• U.S. Treasuries retreated on Wednesday, pulling back from two days of solid gains in longer tenors. The market attempted to build on this week's gains at the start of the cash session, but the move was quickly rebuffed after today's batch of economic data did not show any negative surprises regarding growth, but it reminded about stubborn inflation as year-over-year growth in the PCE Price Index (3.7%) and core PCE (3.3%) remained at levels seen in June while Q2 GDP was unrevised at the headline level (1.5%) but contained upward revisions to PCE (to 5.3% from 5.1%) and core PCE (to 3.6% from 3.4%). Lastly, the Durable Orders report showed above-consensus growth in July (1.1%; Briefing.com consensus 0.5%) and an upward revision to the reading from June (to 0.5% from 0.3%). Mid-morning action saw a brief rise off lows, but 10s and shorter tenors dipped to fresh lows in the afternoon just as the U.S. Treasury sold $70 bln in 5-yr notes to softer demand than what was seen at yesterday's 2-yr note offering. Crude oil remained just above $82/bbl while the U.S. Dollar Index rose 0.2% to 99.16.
• Yield Check:
  • 2-yr: +2 bps to 4.22%
  • 3-yr: +3 bps to 4.29%
  • 5-yr: +3 bps to 4.38%
  • 10-yr: +3 bps to 4.66%
  • 30-yr: +1 bp to 5.19%

• News:
  • The Atlanta Fed's GDPNow forecast for Q3 GDP was revised up to 4.6% from 4.0% in the previous estimate.
  • CIA Director Ratcliffe was aboard the military aircraft that visited Moscow on Tuesday.
  • Bank of Japan Governor Ueda will not attend the Jackson Hole Economic Symposium. Policymaker Tamura, who is a known hawk, will represent the BoJ at the upcoming meeting.
  • Expectations for a September rate hike from the ECB are solidifying, but additional increases are not expected at this time. ECB policymaker Schnabel said that rates must rise with the extent of the increase determined by data.
  • Japan's July Corporate Services Price Index was up 3.6% yr/yr (expected 3.2%; last 3.4%).
  • Australia's July MI Leading Index was unchanged m/m (last 0.1%), July CPI was up 3.5% yr/yr (expected 3.3%; last 3.8%), and Q2 Construction Work Done fell 2.1% qtr/qtr (expected 0.5%; last 4.3%).
  • Singapore's July Industrial Production was up 2.3% m/m (expected 3.0%; last -7.0%), rising 6.8% yr/yr (expected 6.7%: last 7.5%).
  • U.K.'s August CBI Distributive Trades Survey fell to -48 from -26 (expected -35).
  • Swiss August ZEW Expectations rose to 12.1 from 10.0.
• Today's Data:
  • Personal Income increased 0.4% month-over-month in July (Briefing.com consensus 0.2%), personal spending was up 0.2% (Briefing.com consensus 0.2%), the PCE Price Index was up 0.2% (Briefing.com consensus 0.1%), and the core-PCE Price Index also rose 0.2% (Briefing.com consensus 0.2%). On a year-over-year basis, the PCE Price Index was up 3.7% versus 3.7% in June, and the core-PCE Price Index was up 3.3% versus 3.3% in June.
    • The key takeaway from the report is that year-over-year rates for the PCE Price Index (3.7%) and the core-PCE Price Index (3.3%) remained at levels from June, so the report did little to alter the market's view of the latest income and spending trends, aside from an improvement in the personal savings rate.
  • Durable goods orders rose 1.1% month-over-month in July (Briefing.com consensus 0.5%) after a revised 0.5% increase (from 0.3%) in June. Excluding transportation, durable goods orders were up 0.4% month-over-month (Briefing.com consensus 0.5%) after increasing a revised 1.1% (from 0.6%) in June.
    • The key takeaway from the report is that the headline beat was driven by a 12.7% jump in orders for nondefense aircraft and parts while growth in orders excluding transportation undershot expectations slightly due in part to a pullback in new orders for computers and electronic products (-1.1%). However, these orders are still up a healthy 14.3% year-over-year.
  • The second estimate of Q2 GDP showed no revision from the advance estimate of 1.5% (Briefing.com consensus 1.5%). The GDP Chain Deflator was revised up to 6.4% (Briefing.com consensus 6.3%) from 6.3% in the advance estimate.
    • The key takeaway from the report is that the overall growth reading held steady as an upward revision to real final sales to private domestic purchasers (to 4.2% from 3.9%) offset a higher drag from imports.
  • The weekly MBA Mortgage Index fell 1.0% to follow last week's 0.4% decrease. The Refinance Index was down 2.0% while the Purchase Index was down 0.3%.
  • Weekly crude oil inventories increased by 95,000 barrels after increasing by 4.405 mln barrels a week ago.
  • $70 bln 5-year Treasury note auction results (prior 12-auction average):
    • High yield: 4.393% (3.857%).
    • Bid-to-cover: 2.37 (2.38).
    • Indirect bid: 61.5% (63.7%).
    • Direct bid: 28.4% (24.8%).
• Commodities:
  • WTI crude: -0.1% to $82.25/bbl
  • Gold: -1.0% to $4647.10/ozt
  • Copper: -1.6% to $6.60/lb
• Currencies:
  • EUR/USD: -0.2% to 1.1651
  • GBP/USD: -0.4% to 1.3592
  • USD/CNH: +0.1% to 6.7230
  • USD/JPY: +0.1% to 159.40
• The Day Ahead:
  • 8:30 ET: Weekly Initial Claims (Briefing.com consensus 210,000; prior 206,000), Continuing Claims (prior 1.799 mln), July advance International Trade in Goods (prior -$101.5 bln), July advance Retail Inventories (prior 0.0%), and advance Wholesale Inventories (prior 0.3%)
  • 10:30 ET: Weekly natural gas inventories (prior +16 bcf)
• Treasury Auctions:
  • 13:00 ET: $44 bln 7-yr Treasury note auction results