Bond Market Update

Rising Rate Hike Odds Weigh

• U.S. Treasuries had a rough finish to the week with yields on 3s and 5s hitting fresh highs for the year while the long bond outperformed but could not secure a higher finish. Treasuries followed two days of subdued action with a modestly lower start in longer tenors and relative strength up front, but the initial standing was put to a test as soon as the market received Fed Chairman Warsh's speech that he delivered at Kansas City Fed's annual Economic Symposium in Jackson Hole, Wyoming. The Fed Chairman reminded markets that aims to preside over a "quieter Fed", adding that he wants the central bank to be disciplined in its approach to policy instead of focusing on messaging surrounding potential policy changes. When discussing the economy, he highlighted strong business spending and strong profit growth over the past 12 months, but he also acknowledged that the recent rise in commodity prices bears watching for potential inflationary implications. Treasuries faced some volatility as the market digested the speech, before embarking on a retreat that was paced by shorter tenors as the implied likelihood of a September rate hike jumped to 60% from 40% yesterday. Today's selling drove the 5-yr yield to its highest level since early 2025 while the 2-yr yield stopped just two basis points below its peak from July. Longer tenors could not avoid a lower finish today, but the long bond recorded a solid gain for the week while the 10-yr note also climbed. As a result, the 2s10s spread tightened by 14 basis points to 37 bps this week after widening from 27 bps to 52 bps through the better part of the past two months. Crude oil widened this week's loss to $3.69/bbl, or 4.2%, while the U.S. Dollar Index jumped 0.5% to 99.69. The Index reclaimed its 200-day moving average (99.16), adding 0.9% for the week.
• Yield Check:
  • 2-yr: +12 bps to 4.35% (+12 bps this week)
  • 3-yr: +10 bps to 4.40% (+9 bps this week)
  • 5-yr: +9 bps to 4.48% (+6 bps this week)
  • 10-yr: +5 bps to 4.72% (-2 bps this week)
  • 30-yr: +2 bps to 5.21% (-7 bps this week)

• News:
  • The U.S. Treasury announced that it is taking steps to revoke access to U.S. financial institutions from Banque Misr UAE for supporting the Iranian regime.
  • Standard & Poor's affirmed China's A+ sovereign rating with a Stable outlook.
  • Japan's Prime Minister Takaichi confirmed plans to make changes to her cabinet in the second half of September.
  • French Finance Minister Lescure said that the economy suffered greatly after the summer heatwave, adding that data for Q3 will also be impacted.
  • Japan's August Tokyo CPI was up 1.9% yr/yr (last 1.8%) and Tokyo Core CPI was up 1.8%, as expected (last 1.7%). July jobs/applications ratio remained at 1.18 (expected 1.19) and July Unemployment Rate fell to 2.4% from 2.5% (expected 2.5%).
  • India's July Industrial Production was up 6.7% yr/yr (expected 6.0%; last 8.8%) and Manufacturing Output was up 7.3% m/m (last 9.5%).
  • Eurozone's August Business and Consumer Survey rose to 98.4 from 97.1 (expected 97.5).
  • Germany's July Import Price Index was up 0.2% m/m (expected 0.3%; last -0.7%), rising 6.8% yr/yr (last 6.1%). August Unemployment increased by 4,000, as expected (last 6,000) and Unemployment Rate remained at 6.4%, as expected.
  • France's Q2 GDP was unchanged qtr/qtr (expected 0.2%; last -0.2%), growing 0.5% yr/yr (expected 0.7%; last 0.9%). August CPI was up 0.7% m/m, as expected (last 0.6%), rising 2.4% yr/yr (last 2.1%). July Consumer Spending was up 0.5% m/m (expected 0.1%; last 0.6%). Q2 nonfarm payrolls were down 0.1% qtr/qtr (last -0.1%).
  • Italy's June Industrial Sales were down 1.0% m/m (last 0.5%), but up 3.1% yr/yr (last 5.2%). August Business Confidence rose to 89.9 from 89.7 (expected 90.0) and Consumer Confidence rose to 94.5 from 94.2 (expected 95.0).
  • Spain's August CPI was up 0.7% m/m (expected 0.6%; last 0.3%), rising 4.3% yr/yr (expected 4.2%; last 3.6%). August Core CPI was up 2.9% yr/yr (last 3.0%). July Retail Sales fell 0.3% yr/yr (last 0.6%).
  • Swiss August KOF Leading Indicators rose to 106.7 from 104.2 (expected 103.0).
• Today's Data:
  • The final reading for the University of Michigan Consumer Sentiment Index for August increased to 51.7 (Briefing.com consensus: 51.0) from the preliminary reading of 51.0. The final reading for July was 55.2. In the same period a year ago, the index stood at 58.2.
    • The key takeaway from the report is that persistent inflation concerns are undercutting consumer sentiment.
  • The Chicago PMI hit 47.1 in August (Briefing.com consensus 57.0), down from 57.6 in July.
• Commodities:
  • WTI crude: -0.2% to $83.38/bbl
  • Gold: -2.9% to $4528.40/ozt
  • Copper: -0.5% to $6.66/lb
• Currencies:
  • EUR/USD: -0.6% to 1.1582
  • GBP/USD: -0.4% to 1.3532
  • USD/CNH: +0.2% to 6.7325
  • USD/JPY: +0.5% to 160.10
• The Week Ahead:
  • Monday: Nothing of note
  • Tuesday: Final August S&P Global U.S. Manufacturing PMI (prior 53.2) at 9:45 ET; July Job Openings (Briefing.com consensus 7.390 mln; prior 7.359 mln), July Construction Spending (Briefing.com consensus 0.2%; prior -0.1%), and August ISM Manufacturing Index (Briefing.com consensus 55.3%; prior 55.6%) at 10:00 ET
  • Wednesday: Weekly MBA Mortgage Index (prior -1.0%) at 7:00 ET; August ADP Employment Change (Briefing.com consensus 47,000; prior 44,000) at 8:15 ET; July Factory Orders (Briefing.com consensus 0.6%; prior -0.3%) at 10:00 ET; weekly crude oil inventories (prior +4.41 mln) at 10:30 ET; and September Fed Beige Book at 14:00 ET
  • Thursday: July Trade Balance (Briefing.com consensus -$89.6 bln; prior -$73.3 bln), revised Q2 Productivity (Briefing.com consensus 1.4%; prior 1.4%), revised Q2 Unit Labor Costs (Briefing.com consensus 1.3%; prior 1.3%), weekly Initial Claims (Briefing.com consensus 205,000; prior 203,000), and Continuing Claims (prior 1.778 mln) at 8:30 ET; final August S&P Global U.S. Services PMI (prior 56.8) at 9:45 ET; August ISM Non-Manufacturing Index (Briefing.com consensus 54.1%; prior 54.1%) at 10:00 ET; and weekly natural gas inventories (prior +15 bcf) at 10:30 ET
  • Friday: August Nonfarm Payrolls (Briefing.com consensus 45,000; prior -23,000), Nonfarm Private Payrolls (Briefing.com consensus 45,000; prior 30,000), Unemployment Rate (Briefing.com consensus 4.2%; prior 4.1%), Average Hourly Earnings (Briefing.com consensus 0.2%; prior 0.1%), and Average Workweek (Briefing.com consensus 34.3; prior 34.3) at 8:30 ET