US TSYS: Yields Unchanged In A Quiet Session
The TYZ5 range has been 112-12+ to 112-15 during the Asia-Pacific session. It last changed hands at 112-14, up 0-01+ from the previous close.
- The US 2-year yield is trading 3.586%.
- The US 10-year yield is trading around 4.15%.
- 10-Year yields bounced on the back of global politics but remains subdued below 4.20% as the market works through the US shutdown. I suspect buyers continue to be around 4.20% initially and look to fade the move higher.
- Bloomberg - “Global Long Bonds Can Breathe Easier After 30-Year JGB Sale. Japan’s thirty-year auction went off smoothly with a higher bid-to-cover ratio than the previous sale, which will be a relief for investors across G-10 long-term debt. Traders will also be reassured with MUFJ-MS taking up the biggest slice of the bonds, along with Japan’s other big primary dealers.”
Gavekal on X: “With the Bureau of Labor Statistics temporarily dark due to the US government shutdown, investors and the Federal Reserve must rely on other employment data. Worryingly, ADP’s private payroll estimate showed its most significant contraction of this cycle. That could be the result of the immigration crackdown reducing the supply of available workers. It is also possible that slack is starting to appear in the labor market, perhaps due to the temporary fiscal contraction from tariffs or AI causing unemployment, especially among young graduates. The recent decline in jobless claims is encouraging, but it is worth noting that many young graduates do not have prior work history and thus may not be eligible to claim unemployment benefits.” See Graph Below.
Fig 1: 10-Year US Yield 2H Chart
Source: MNI - Market News/Bloomberg Finance L.P
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LOOK AHEAD: US Macro: PPI (Wed) and CPI (Thu) Inflation
US PPI inflation is released on Wednesday before CPI inflation on Thursday, an unusual ordering that should see core PCE implications dialled in after the CPI release rather than the usual wide range waiting for specific PPI details. PPI will be watched more closely than usual this month after a far stronger than expected jump in last month’s July report fired a warning short over tariff-based cost pressures starting to feed through. That included a 0.6% M/M increase in our preferred core series of PPI ex food, energy & trade services, which strips out items such as the then booming portfolio management & investment advice category following the strength in equity markets. It's too early to gauge an accurate sense of analyst expectations for August.
CPI inflation on Thursday will then be the last major release ahead of the Sep 17 FOMC decision. Consensus looks for core CPI at 0.3% M/M after the 0.32% M/M in July, another monthly increase comfortably above a pace consistent with 2% inflation. August should in theory start to see the largest tariff impacts along with September and possibly October. Returning to July’s report, core goods inflation was softer than expected, at a still solid (by core goods standards) 0.2% M/M for a second month running but about half that of 0.4% expected by analysts. Instead, non-housing core services surprised higher. The latter was a “dangerous” development in the words of a usually dovish Chicago Fed’s Goolsbee (’25 voter), who speaking after Friday’s payrolls report is still undecided on a September cut whilst looking for August inflation data “to get more information”.
LOOK AHEAD: US Macro: Payrolls Preliminary Benchmark Revisions (Tue)
- The BLS on Tuesday will publish preliminary estimates of benchmark revisions, based off QCEW data for Q1.
- These will give an indication of the actual benchmark revisions on the Mar 2025 level of payrolls due with the Jan 2026 payrolls report released in early February.
- Bear in mind that the final benchmark estimate tends to nearly always be more negative than the preliminary figure – see historical values to the right.
- That doesn’t mean they can’t be large again after last year’s historically negative revision that lowered the level of payrolls by ~600k. Initial estimates we’ve seen look for another large downward revision, with the smallest being worth -550k but with wide ranges higher.
FED: Barclays Adds A Cut To 2025 Fed View
Barclays analysts now expect three Fed cuts in the remainder of the year, adding October to their pre-existing call for 25bp reductions in September and December. "Given the disappointing August employment report, we expect the FOMC to see more elevated downside risks to the employment side of the mandate."
- As for a 50bp September cut, "we think that the FOMC will view [that] as sending too strong a signal that labor market conditions are deteriorating. Indeed, we think that participants such as Powell understand that the slower pace of payroll employment reflects at least, in part, slower labor supply, which does not translate into increased labor market slack."
- For 2026 they continue to expect 25bp cuts in March and June to 3.00-3.25%, but "we do not think the FOMC will be able to cut rates more than twice next year, as we think that activity will show some slight acceleration, with the economy adapting to the new tariff environment and fiscal policy providing some support, and the unemployment rate will revert down amid limited increase in labor supply."
