Bond Market Update

Short End Leads Thursday Bounce

• U.S. Treasuries climbed on Thursday, though they made little intraday progress, finishing near their starting levels. Treasuries followed yesterday's sideways session with a higher open after a night of steady buying in Treasury futures that took place despite more upward pressure on crude oil. Treasuries extended their starting gains shortly after the open after Fed Governor Waller said that he would vote to hold the fed funds rate range steady at the September meeting if there are no negative surprises in upcoming data. He also said that some signs of disinflation are being seen, though he acknowledged that overall inflation remains meaningfully above target. Treasuries notched highs 30 minutes after the start, followed by a swift return to their starting levels. The market made another late morning run at highs, but never made it there, resulting in a narrowing range into the afternoon that kept action within striking distance of today's opening levels. Today's economic data, which included a small uptick in weekly jobless claims (to 206,000 from 204,000), a slight downward revision to Unit Labor Costs for Q2 (to 1.2% from 1.3%), and an acceleration in the ISM Services Index for August to 55.4% from 54.1%, prompted the Atlanta Fed to trim its GDPNow forecast for Q3 to 4.7% from 4.8% in the previous estimate. Tomorrow's session will bring the Employment Situation report for August, which always garners some added attention. Crude oil pushed above $91/bbl while the U.S. Dollar Index fell 0.7% to 98.93 as the yen jumped back to its August high against the greenback after overnight focus on yesterday's admission from Treasury Secretary Bessent that he knows what Japan is planning on doing. His comment essentially served as verbal intervention, lifting the yen into the upper half of this year's range against the dollar.
• Yield Check:
  • 2-yr: -6 bps to 4.33%
  • 3-yr: -4 bps to 4.41%
  • 5-yr: -4 bps to 4.51%
  • 10-yr: -3 bps to 4.76%
  • 30-yr: -2 bps to 5.24%

• News:
  • China Securities Journal expects the yuan to continue appreciating moderately this year.
  • The Japanese government is reportedly looking to guide 40% of household assets into equities, investment trusts, and bonds by 2040, up from the current 25%.
  • Germany's Chancellor Merz will meet with ECB officials ahead of next week's policy meeting, which is expected to result in a rate hike.
  • Germany's IfW raised the domestic growth forecast for 2026 to 1.3% from 0.8% while the ifo Institute raised its domestic growth forecast to 1.4% from 0.8%.
  • China's August RatingDog Services PMI hit 51.4 (expected 50.6; last 50.4).
  • Japan's August Services PMI hit 52.5 (expected 52.3; last 51.2).
  • Hong Kong's August Manufacturing PMI hit 49.5 (last 51.0).
  • Australia's August Services PMI hit 53.2 (expected 52.9; last 53.6). July trade surplus reached AUD1.923 bln (expected surplus of AUD1.400 bln; last surplus of AUD2.341 bln) as imports fell 2.5% m/m (last -0.7%) and exports fell 3.3% m/m (last 9.1%).
  • New Zealand's Q2 Terms of Trade Index was down 9.0% qtr/qtr (expected -2.1%; last -1.9%).
  • India's August Services PMI hit 54.1 (expected 54.5; last 53.3).
  • Eurozone's August Services PMI hit 51.6 (expected 51.7; last 51.7). July PPI was up 1.6% m/m (expected 1.2%; last -0.3%), rising 5.8% yr/yr (last 4.6%).
  • Germany's August Services PMI hit 49.7 (expected 48.5; last 49.8).
  • U.K.'s August Services PMI hit 52.5 (expected 52.8; last 52.1).
  • France's August Services PMI hit 48.0 (expected 48.4; last 49.6).
  • Italy's August Services PMI hit 55.2 (expected 53.6; last 52.5).
  • Spain's August Services PMI hit 57.8 (expected 59.0; last 58.3).
  • Swiss Q2 GDP expanded 1.9% qtr/qtr (expected 1.5%; last 0.6%), growing 2.8% yr/yr (last 0.5%). August CPI was up 0.4% m/m (expected 0.0%; last -0.1%), rising 0.8% yr/yr (expected 0.5%: last 0.4%).
• Today's Data:
  • The ISM Services PMI increased to 55.4% in August (Briefing.com consensus: 54.1%) from 54.1% in July. The dividing line between expansion and contraction is 50.0%, so the August reading reflects services sector activity growing at a faster pace than the prior month.
    • The key takeaway from the report is that it shows services organizations haven't seen any relief in the prices they are paying for materials and services. That invites the risk of pass-through to customers and sustained inflation issues.
  • The trade deficit widened to $88.6 billion in July (Briefing.com consensus: -$89.6 billion) from an upwardly revised -$71.2 billion (from -$73.3 billion) in June, as imports were $10.8 billion more than June imports and exports were $6.6 billion less than June exports.
    • The key takeaway from the report is that the widening deficit will be a drag on Q3 GDP growth estimates. Q2 productivity was 1.4%, unchanged from the advance estimate and as expected.
  • Unit labor costs, though, were revised down to 1.2% (Briefing.com consensus: 1.3%) from 1.3% in the advance estimate.
    • The key takeaway from the report is that the downtick in unit labor costs from the advance estimate helped keep inflation concerns in check.
  • Initial jobless claims for the week ending August 29 increased by 2,000 to 206,000 (Briefing.com consensus: 205,000). Continuing jobless claims for the week ending August 22 increased by 8,000 to 1.779 million.
    • The key takeaway from the report is that the low level of initial jobless claims continues to connote a low-firing environment.
  • The S&P Global U.S. Services PMI hit 56.5 in the final reading for August, down from 56.8 in the flash reading and up from July's final reading of 54.6.
  • Weekly natural gas inventories increased by 30 bcf after increasing by 15 bcf a week ago.
• Commodities:
  • WTI crude: +0.4% to $91.35/bbl
  • Gold: +2.8% to $4540.40/ozt
  • Copper: +1.2% to $6.67/lb
• Currencies:
  • EUR/USD: +0.4% to 1.1633
  • GBP/USD: +0.4% to 1.3538
  • USD/CNH: UNCH at 6.7173
  • USD/JPY: -2.0% to 155.59
• The Day Ahead:
  • 8:30 ET: 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)