Bond Market Update

Good Jobs Report Invites Friday Retreat

• U.S. Treasuries finished the week on a lower note after a strong jobs report for August prompted a reversal from a modestly higher start. Treasuries started the Friday session with slight gains after a quiet night in the futures market gave way to a small rally in the minutes leading up to the cash open. However, the positive start was reversed in immediate reaction to the August Employment Situation report, which showed much stronger-than-expected growth in Nonfarm Payrolls (162,000; Briefing.com consensus 45,000), coupled with an upward revision to the July reading (to +21,000 from -23,000). Average Hourly Earnings increased 0.3% month-over-month (Briefing.com consensus 0.2%) and the July reading was also revised higher (to 0.2% from 0.1%). The report prompted another shift in rate expectations, with the market again seeing a 60% implied likelihood of an increase to the fed funds rate range in just under two weeks. However, even with the positive revisions, the three-month average for payroll growth was just 71,000 and there was an increase in persons unemployed for 27 weeks or more to 27.0% from 25.5%, so the strong report still had some soft spots. Furthermore, the market will receive August PPI (Briefing.com consensus 0.4%; prior 0.0%) and August CPI (Briefing.com consensus 0.4%; prior 0.1%) next week, so there is still potential for more shifts in rate expectations. Treasuries notched session lows in immediate reaction to the jobs report, recovering a good chunk of their losses over the next hour before spending the remainder of the day in a sideways range. The rebound lifted the long bond back into positive territory, but it slipped back into the red ahead of the close while shorter tenors recorded wider losses. Overall, this week's action saw relative weakness in the belly and the 2s10s spread expanded by three basis points to 40 bps. Crude oil narrowed this week's gain to $8.12/bbl while the U.S. Dollar Index rose 0.3% to 99.16, trimming this week's loss to 0.5%.
• Yield Check:
  • 2-yr: +5 bps to 4.38% (+3 bps this week)
  • 3-yr: +4 bps to 4.45% (+5 bps this week)
  • 5-yr: +4 bps to 4.55% (+7 bps this week)
  • 10-yr: +2 bps to 4.78% (+6 bps this week)
  • 30-yr: UNCH at 5.25% (+4 bps this week)

• News:
  • The U.S. Treasury sanctioned Golden Global investment bank due to the bank's dealings with Iran.
  • Norway's sovereign wealth fund may trim its holdings of U.S. Treasuries, according to FT.
  • Japan's Finance Minister Katayama confirmed that the budget for fiscal 27/28 will reach a new record of JPY143 trillion.
  • The U.K. is looking to approve new oil drilling efforts in the North Sea.
  • Volkswagen's supervisory board approved a plan that calls for up to 50,000 additional job cuts.
  • Japan's July Household Spending was up 0.5% m/m (expected 2.6%; last -6.4%) but down 3.6% yr/yr (expected -1.6%; last -3.3%).
  • South Korea's July Current Account surplus reached $42.08 bln (last surplus of $49.73 bln).
  • Eurozone's July Retail Sales were down 0.6% m/m (expected 0.3%; last 0.2%) but up 0.6% yr/yr (expected 1.1%; last 1.4%).
  • Germany's July Factory Orders rose 2.5% m/m (expected 0.3%; last 3.7%).
  • Italy's July Retail Sales were down 0.4% m/m (expected 0.2%; last -0.2%) but up 0.8% yr/yr (last 3.1%).
• Today's Data:
  • August nonfarm payrolls increased by 162,000 (Briefing.com consensus: 45,000). The 3-month average for total nonfarm payrolls increased to 71,000 from 38,000. July nonfarm payrolls revised to 21,000 from -23,000. June nonfarm payrolls revised to 31,000 from 20,000. o August private sector payrolls increased by 127,000 (Briefing.com consensus: 45,000). July private sector payrolls revised to 71,000 from 30,000. June private sector payrolls revised to 26,000 from 30,000.
    • August unemployment rate was 4.1% (Briefing.com consensus: 4.2%) versus 4.1% in July. Persons unemployed for 27 weeks or more accounted for 27.0% of the unemployed versus 25.5% in July. The U6 unemployment rate, which accounts for unemployed and underemployed workers, decreased to 7.7% from 7.9% in July.
    • August average hourly earnings were up 0.3% (Briefing.com consensus: 0.3%) on the heels of an upwardly revised 0.2% increase (from 0.1%) in July. Over the last 12 months, average hourly earnings have risen 3.1% versus 3.2% for the 12 months ending in July.
    • The average workweek in August was 34.4 hours (Briefing.com consensus: 34.3) versus 34.3 hours in July. The manufacturing workweek increased 0.1 hour to 40.5 hours. Factory overtime was unchanged at 3.1 hours.
    • The labor force participation rate increased to 61.6% from 61.4% in July and the employment-population ratio increased to 59.1% from 58.9% in July.
• Commodities:
  • WTI crude: +0.2% to $91.50/bbl
  • Gold: -1.4% to $4476.00/ozt
  • Copper: +0.2% to $6.68/lb
• Currencies:
  • EUR/USD: -0.1% to 1.1612
  • GBP/USD: -0.1% to 1.3515
  • USD/CNH: -0.1% to 6.7084
  • USD/JPY: +0.3% to 156.22
• The Week Ahead:
  • Monday: **Bond and equity markets closed for Labor Day**
  • Tuesday: August NFIB Small Business Optimism Index (Briefing.com consensus 99.3; prior 99.8) at 6:00 ET; $58 bln 3-yr Treasury note auction results at 13:00 ET; and July Consumer Credit (Briefing.com consensus $11.3 bln; prior $14.2 bln) at 15:00 ET
  • Wednesday: Weekly MBA Mortgage Index (prior 0.8%) at 7:00 ET and $39 bln 10-yr Treasury note auction results at 13:00 ET
  • Thursday: August PPI (Briefing.com consensus 0.4%; prior 0.0%), Core PPI (Briefing.com consensus 0.3%; prior 0.2%), weekly Initial Claims (Briefing.com consensus 208,000; prior 206,000), and Continuing Claims (prior 1.779 mln) at 8:30 ET; July Wholesale Inventories (Briefing.com consensus 1.3%; prior 0.2%) and August Existing Home Sales (Briefing.com consensus 4.03 mln; prior 4.06 mln) at 10:00 ET; weekly natural gas inventories (prior +30 bcf) at 10:30 ET; weekly crude oil inventories (prior -4.45 mln) at 12:00 ET; and $22 bln 30-yr Treasury bond reopening results at 13:00 ET
  • Friday: August CPI (Briefing.com consensus 0.4%; prior 0.1%) and Core CPI (Briefing.com consensus 0.2%; prior 0.2%) at 8:30 ET; preliminary September University of Michigan Consumer Sentiment (Briefing.com consensus 51.5; prior 51.7) at 10:00 ET; and August Treasury Budget (Briefing.com consensus -$485.0 bln; prior -$432.3 bln) at 14:00 ET