Bond Market Update

Short End Slides After Rate Hike

• U.S. Treasuries had a mixed showing on Wednesday, as the front retreated after the Fed announced a 25-basis point rate hike while the long end outperformed with the long bond near its starting level. The trading day started with modest gains, as Treasuries crawled off their lowest levels of the year after an overnight pullback in the price of oil. Treasuries built on their opening gains through the rest of the morning, even though the Retail Sales report for August (1.2%; Briefing.com consensus 0.9%) beat expectations despite budding worries that elevated inflation will eat into consumer spending. The entire complex lurched to fresh highs in immediate reaction to the FOMC Statement, but the short end quickly backed down, deepening its reversal as the afternoon went on while the long bond defended its gain. Besides the rate hike announcement, the central bank released its latest economic projections, which showed a slight increase in the median estimate for 2026 GDP to 2.3% from 2.2% in the June estimate. The median estimate for 2026 PCE inflation also increased by ten basis points to 3.7% from 3.6% in June while the median estimate for the fed funds rate for this year increased to 4.1% from 3.8% in the June estimate, suggesting another hike could be announced before the end of the year. The market, for its part, is considering the possibility of two more hikes taking place before 2027. Crude oil pulled back from its best level since mid-May while the U.S. Dollar Index rose 0.5% to 100.10.
• Yield Check:
  • 2-yr: +7 bps to 4.73%
  • 3-yr: +5 bps to 4.81%
  • 5-yr: +3 bps to 4.86%
  • 10-yr: +1 bp to 5.01%
  • 30-yr: -2 bps to 5.35%

• News:
  • There was some speculation that President Trump and China's President Xi will discuss reducing tariffs on agriculture and energy products when they meet next week.
  • Japan's Prime Minister Takaichi confirmed that she will make changes to her cabinet tomorrow, but key officials are expected to maintain their posts.
  • European Commission President von der Leyen called on member states to admit Canada as an associate member.
  • Japan's August trade deficit reached JPY840 bln (expected deficit of JPY1.00 trln; last deficit of JPY680 bln) as imports grew 28.0% yr/yr (expected 26.3%; last 27.9%) and exports rose 19.3% yr/yr (expected 18.2%; last 23.2%). July Core Machinery Orders were down 3.7% m/m (expected -1.2%; last 9.7%) but up 11.2% yr/yr (expected 15.3%; last 16.9%).
  • Australia's August MI Leading Index was unchanged (last 0.0%).
  • New Zealand's Q3 Westpac Consumer Sentiment rose to 89.5 from 80.4 and Q2 Current Account deficit narrowed to 3.2% of GDP from 3.6% of GDP.
  • Eurozone's July Industrial Production was down 0.1% m/m (expected -0.2%; last -0.1%) and unchanged yr/yr (expected -0.3%; last -0.3%). Q2 Wages rose 3.0% yr/yr (last 3.4%) and Q2 Labor Cost Index was up 3.1% yr/yr (expected 3.0%; last 3.2%).
  • U.K.'s August CPI was up 0.5% m/m, as expected (last 0.3%), rising 3.1% yr/yr, as expected (last 2.9%). August Core CPI was up 0.3% m/m, as expected (last 0.2%), rising 2.6% yr/yr, as expected (last 2.6%). August Input PPI was up 0.3% m/m (expected 0.6%; last -0.8%) and Output PPI was up 0.3% m/m (last 0.5%). August House Price Index rose 1.4% yr/yr (expected 2.1%; last 2.0%).
  • Italy's August CPI was up 0.5% m/m, as expected (last 0.3%), rising 3.3% yr/yr, as expected (last 2.9%).
• Today's Data:
  • Total retail sales increased 1.2% month-over-month in August (Briefing.com consensus: 0.9%) following an upwardly revised 0.5% decline (from -0.6%) in July. Excluding autos, retail sales surged 1.4% (Briefing.com consensus: 0.5%) following an upwardly revised 0.2% decline (from -0.3%) in July.
    • The key takeaway from the report is that it is indicative of ongoing strength in consumer spending on goods. Take gas station sales out of the equation, and retail sales were still up 1.1% month-over-month; core sales, which exclude autos, gasoline, building materials, and food services, jumped 1.4%.
  • Import prices were up 0.7% in August while the July decrease was revised up to 0.3% from -0.4%. Excluding oil, import prices were up 0.8% after increasing a revised 0.3% (from 0.4%) in July. Export prices were up 0.6% in August after decreasing a revised 1.4% (from -1.3%) in July. Excluding agriculture, export prices were up 0.7% in August after decreasing a revised 1.6% (from -1.5%) in July.
  • The NAHB Housing Market Index fell to 32 in September (Briefing.com consensus 34) from 35 in July.
  • Business Inventories were up 0.8% in July (Briefing.com consensus 0.2%) after increasing a revised 0.1% (from 0.0%) in June.
  • The weekly MBA Mortgage Index fell 4.1% to follow last week's 2.7% decrease. The Purchase Index fell 0.8% while the Refinance Index was down 8.8%.
  • Weekly crude oil inventories decreased by 640,000 barrels after decreasing by 391,000 barrels a week ago.
• Commodities:
  • WTI crude: -3.2% to $102.41/bbl 
  • Gold: +1.3% to $4388.40/ozt
  • Copper: +1.1% to $6.51/lb
• Currencies:
  • EUR/USD: -0.5% to 1.1480
  • GBP/USD: -0.6% to 1.3389
  • USD/CNH: UNCH at 6.7125
  • USD/JPY: +0.5% to 155.82
• The Day Ahead:
  • 8:30 ET: August Housing Starts (Briefing.com consensus 1.325 mln; prior 1.239 mln), Building Permits (Briefing.com consensus 1.410 mln; prior 1.443 mln), weekly Initial Claims (Briefing.com consensus 209,000; prior 206,000), Continuing Claims (prior 1.774 mln), and September Philadelphia Fed survey (Briefing.com consensus 35.0; prior 47.4)
  • 10:00 ET: August Pending Home Sales (Briefing.com consensus 0.5%; prior -2.3%)
  • 10:30 ET: Weekly natural gas inventories (prior +40 bcf)