US DATA REACT: MS says "The composite ISM manufacturing gauge pulled back to 52.7 in July after rebounding from a two-year low of 51.5 in March and April to 53.5 in June, improvement that hadn't been reflected in much upside in hard data in the IP report. The pullback in July was concentrated in slower growth in the employment index (52.7 v. 55.5) and a correction in inventories (49.5 v. 53.0)." BMO says "ISM manufacturing headline was dragged down by employment (-2.8 pts to a 2-month low of 52.7----mostly petroleum & coal) and inventories (-3.5 pts)." JPM says after PI data, "There is a little bit of downside risk to the 2.9% real consumption estimate we have penciled into our 2.5% real GDP forecast for 3Q, but we do not have much information regarding the 3Q data at this point."
US DATA REACT: BNP says "June construction spending increased by just 0.1% m/m, consensus and our own expectations for a larger increase. Still, upward revision to prior months' data suggests significant upward revisions to Q2 growth." FTN says of PCE data, "Consumption growth outpaced retail sales in the second quarter, a fact underscored by upward revisions to April and May service spending that offset much of the downward revisions in the April and May retail control group. (The control group is the goods-dominated core from the retail sales report that is the base for consumption calculations by the BEA.) Healthcare has significantly boosted consumption in the past year and a half, but it is starting to slow now."
US DATA REACT: BNP says "July's final Markit PMI came in at 53.8, little changed from preliminary estimates, and solidly below levels we saw this time last year. On an ISM adjusted basis, the measure declined 0.1 point."
US DATA REACT: HFE says ISM was "a little weaker than expected, although the leading orders component rose and the index is still up from its low, consistent with weakness in manufacturing fading slightly at least. The headline index was as low as 51.5 three months ago."
US DATA REACT: MS says "Q2 consumption rising in line with our forecast of 2.9% instead was supported by April being adjusted up to 0.2% from 0.0%. That's a more negative monthly trajectory for Q3 growth. We lowered our Q3 consumption forecast slightly to 2.3% from 2.4%."
US DATA REACT: TD says "ISM manufacturing index slipped unexpectedly in July, falling to 52.7 from 53.5. This was a weaker performance than the market consensus for an unchanged print, and it suggests that the economic recovery is leaking momentum." BNP says "The biggest movers in the month was production on the positive side and inventories, backlog of orders, and employment on the negative front. The details of the report were tilted negative."
US TSYS/OVERNIGHT REPO: The overnight repo market saw the Treasury General Collateral rate calm down somewhat from last Friday's month-end rocky trading, said traders. But it may take some more days for the Treasury G/C rate to really move lower, they said. Meanwhile the one-month T-bills, old 2-year notes and the current 10-year notes saw demand from various accounts, said traders. "There are residual shorts in the 10-year notes," said one trader. (More)
US PIPELINE: /RATINGS: Celgene (CELG) is in play today with a 5-part debt sale, in part to help fund its $7.2 billion purchase of Receptos (RCPT) and for share buybacks. Moody's (MCO) today cut Celgene's (CELG) senior unsecured credit rating to 'Baa2' from 'Baa1,' based mainly on the higher leverage as a result of the acquisition and from the expected stock repurchases. Moody's (MCO) also said that Celgene (CELG) "has significant revenue concentration in Revlimid," an anemia-related pharmaceutical, and "faces an unresolved patent challenge on this product." The ratings agency added that given the revenue concentration, "Celgene's (CELG) financial leverage is moderately high, with pro forma debt/EBITDA of approximately 3.9x, which Moody's (MCO) expects to decline below 3.0x due to EBITDA growth." An estimated $7.6 billion of rated Celgene (CELG) debt rated by Moody's (MCO) is affected by the downgrade.
US DATA: Jun construction spending +0.1% (to new high since Jul'08), with pvt -0.5% and public +1.6%. Despite disappointing Jun for residential (+0.4% for pvt res, with 1fam -0.3% and multis +2.8%), appears these levels exceed those assumed in GDP accounts, so will add to Q2 growth (May constr rev to +1.8%). Details show weakness in comml and office bldgs in nonres, strength in amusement, water and transport in public spending.
FED: Re Fed's TDFs for Aug, two operations will be conducted - one on August 6 for 14-day term deposits and one on August 13 for 7-day term deposits. These operations will each offer floating-rate term deposits with the maximum individual award amount set at $5 billion, and the rate set equal to the sum of the interest rate on excess reserves (currently 25 basis points) plus a fixed spread of 1 basis point. Term deposits offered in these two operations will include an early withdrawal feature and settle on the same day each operation is executed. The usual offering details will come later.
ECB: Total purchases under ECB Asset Purchase Programme in July dropped to E61.3bln from E63.2bln in June. Purchases of German bonds was little changed in July, totalling E11.975bln vs E11.97bln, although weighed average maturity ticked higher to 6.91 from 6.87. Weighted average maturity of purchases in Spain dropped to 9.66 from 9.82 but increased in Italy to 9.03 from 8.83.
US TSYS: Treasuries continue to see more short-covering after soft ISM. "We're going to have live with this number-to-number (outsize market reaction) stuff until the Fed gets the guts to lift rates," said one veteran trader. "The Fed's reluctance to lift rates is hurting this economy, by holding back businesses and investors."
DATA REACT: Mesirow Financial's Diane Swonk said the "PCE index, the Federal Reserve's favored measure for underlying inflation as it more accurately captures consumer behavior than the CPI, rose 0.2% in June from May inflation. A fall in big-ticket durables (largely vehicles) tempered gains elsewhere. Energy prices edged higher but will be a drag on overall inflation again in July. The PCE rose an almost imperceptible 0.3% from a year ago. The core PCE edged up to 0.1% to post a 1.3% increase from a year ago. The core PCE has been essentially stuck in the 1.3% range since the start of the year. Initially, this was a relief to most at the Fed who expected core inflation to decelerate in response to lower oil and falling import prices. Now, some on the Fed are growing wary that core inflation isn't picking up a little faster." She adds Fed cares on core inflation "because overall inflation always converges to the core, making it the best predictor of overall inflation. Core of 1.3% represents an ongoing miss for the Fed of its 2% target. This may not stop the Fed from raising rates the first time. It will, however, provide pause for them to move after September. Indeed."
US TSYS/RESEARCH: Tsys gain further still, 10-year note 2.185%. JPM analysts Jay Barry, Bruce Sun and Phoebe White said in its August refunding preview, that "Treasury will announce its quarterly financing estimates Monday and the quarterly refunding auctions Wednesday morning. We expect Treasury to have net marketable borrowing needs of $215bn during the July-September quarter, and to raise $116bn in the October-December quarter." They expect Treasury will announce later this week that it will sell "$23bn 3-year notes, $24bn 10-year notes, and $16bn 30- year bonds for auction the following week. This would leave the 3-year auction size $1bn lower than last month, and 10s and 30s unchanged from the May refunding. Our economists continue to project a $465bn budget deficit for FY15, $18bn lower than the $483bn deficit realized in FY14, and we expect Treasury to announce that it will make $1bn in cuts to 2- and 3-year auction sizes in August and September, bringing auction sizes to $24bn and $22bn, respectively."
US PIPELINE: /US CORPORATES: Issuers of investment-grade corporate bonds are likely to rush to market to take advantage of still ultra-low borrowing costs before the Fed decides to raise interest rates. But it has been "two or three years now that we've been hearing that companies need" to enter the investment-grade corporate primary market "before the window closes," and the Federal Reserve hikes rates, said a senior fixed-income portfolio manager. "And it just keeps coming, and it still gets absorbed," he said. While corporate credit spreads have widened over the past few weeks, amid a bout of volatility that included a fall in global commodity prices, a plunge in Chinese equities, as well as global growth concerns, "you would think there would be more push back" among bond investors, "but there is still this demand for yield," he added. July ended with a massive $160.115 billion of high grade debt issuance, trouncing the $65.848 billion tally in the same year-ago period. Visit the US$ Credit Supply pipeline for a full list of deals.
COMMODITIES: Kevin Norrish of Barclays (BCS) says "the recent decline in commodities prices is reminiscent of last year's sharp falls, which were an indicator of much weaker than expected growth in emerging markets." While the latest sell-off in commodities has been driven more by "bearish commodity supply trends than demand trends," the "negative feedback effects of falling commodities prices into emerging markets are a risk factor that needs to be closely watched." Barclays (BCS) 2015 annual GDP forecast for EM is currently 4.4% y-o-y, vs the 5.2% estimate made in June 2014, "and is a substantial slowdown on last year's actual outturn of 4.8%."
US TSYS: Tom di Galoma, head of rate trading at ED&F Man, said "this year's trend has been most consistent with a broader repricing selloff and yield curve steepening at the beginning of the month due to corporate supply hedging and stronger than anticipated Tier 1 economic data." He favors "selling rallies as a setup for better location for next week's long-end Treasury supply" of 3Y, 10Y, 30Y Treasury auctions.
DATA REACT: Amherst Pierpont chief economist Stephen Stanley said of the morning June income/PCE data, "no big surprises here. If anything, slightly dovish for Fed but remember that these data were already included in the GDP data last week." He adds that "in terms of the two things I highlighted Friday, spending in June was no better than my original expectation (even though the quarterly figure was stronger). So no big lift heading into Q3. My Q3 GDP estimate for the moment is below 2 1/2% because I expect inventories to be a drag." He added that "on core PCE, we rounded down to 0.1% by the slightest of margins. I had a 0.16% gain, so the result looks soft relative to my forecast but is no big surprise. The yoy gain is 1.3%, as expected and with revisions has been 1.3% every month this year. But the monthly figure annualized is 1.8% and the pace over last 5 months is similar to that. Yoy figures will begin to accelerate little by little starting in July."
MNI: US ISM PURCHASING MANAGERS INDEX 52.7 JULY VS 53.5 JUNE US ISM PRICES PAID INDEX 44.0 JULY VS 49.5 JUNE (NSA) US ISM NEW ORDERS INDEX 56.5 JULY VS 56.0 JUNE US ISM EMPLOYMENT INDEX 52.7 JULY VS 55.5 JUNE US ISM PRODUCTION INDEX 56.0 JULY VS 54.0 JUNE US ISM SUPPLIER DELIVERY INDEX 48.9 JULY VS 48.8 JUNE US ISM ORDER BACKLOG INDEX 42.5 JULY VS 47.0 JUNE (NSA)
US DATA REACT: Bob Sinche of Amherst Pierpont says say no "major surprises" in the June personal pending data released earlier. Nevertheless, he says "the consumer remains well-positioned to increase spending as gasoline prices head lower during the important summer travel season, with the savings rate ticking back up to 4.8% in June from a revised 4.6% in May (data include benchmark revisions for recent years)." Sinche reminds that "Starting in late 2014 real consumption has lagged slightly below real wage & salary income, suggesting there remains potential for consumers to maintain a steady pace of future spending growth."
DATA REACT: BNP Paribas (BNPQF) economist Laura Rosner said that "real personal spending took a pause in June." She adds that "today's personal income and spending report provided monthly detail consistent with the Q2 GDP report released last week. Nominal personal income increased 0.4% m/m in June, in line with our forecast, and nominal personal spending rose 0.2% m/m, slightly below our expectations." She said that "headline PCE prices rose 0.23% m/m, a touch below our expectation (0.25%). Thus, in real terms, personal spending was flat in June while disposable income increased 0.2% m/m." Meanwhile she adds that "the core PCE price index increased 0.15% m/m in June, slightly below our forecast for a 0.17% gain. In y/y terms core PCE inflation held steady at 1.3%, a tenth higher than market expectations. Over the last three months core PCE prices have risen 0.141% m/m on average." And the "market-based core PCE price index, which excludes imputed prices, increased 0.09% m/m for the second straight month," she said.
DATA REACT: High Frequency Chief US economist Jim O'Sullivan said "the Q2 totals for PCE prices, consumption and income were released with GDP last week; the just-released June report merely provided more monthly detail." He said that "core PCE prices were +0.1% m/m in June, matching the consensus; we also had 0.1%. The y/y increase was 1.3% following an upward-revised 1.3% in May (revised from 1.2%). The overall PCE price index was +0.2% m/m, lifting the y/y figure to 0.3% from 0.2%." He adds that "nominal consumption was +0.2% m/m in June, matching the consensus, following +0.7% in May (revised from 0.9%). We forecast 0.3%. Nominal income was +0.4% m/m, above the +0.3% consensus, following +0.4% (unrevised revised from 0.5%). We also had 0.3%." He added that "in real terms, consumption was just 0.0% m/m in June but rose at a 2.9% annual rate in Q2, up from a 1.7% pace in Q1."
US TSY OPTIONS: Recent floor trade, -- -2,000 TYU 127.5/128.5 call spds at 21/64 vs. +4,000 TYZ 129/130 call spds at 13/64, rolling out and up for 5/64 net debit on ratio spd -- 2,000 TYU 124 puts, 2/64 vs. 127-06.5 -- +3,200 wk1 TY 126/126.5 put spds, 5/64 vs. 127-13
US TSYS/RESEARCH: JPM analysts said "traditional Fed tightening cyclicals and position technicals suggest there is room for front-end yields to rise, while conflicting pressures should keep longer-maturity Treasuries more range-bound: stay short the 2-year sector and hold 5s/30s flatteners."
US TSYS: Treasuries ebb mildly lower off session high prices on firmer PCE and PCE core; however dip buying soon came in so the market remained relatively stable. The cash 10-year note is at 2.196% and 2-year note is at 0.684%. The market also saw 5/30Y and 2/30Y flatteners going on in morning action.
US TSYS/RESEARCH: JPMorgan (JPM) analysts Alex Roever and Kimberly Harano said that the "unexpectedly weak gain in the ECI does not preclude a September rate hike, but it does lessen the odds and places greater importance on the next two employment reports." They "continue to look for September liftoff and remain short the front end. Longer-term yields will struggle to rise in the face a higher dollar fueled by volatile EM markets and weak commodities."
US DATA: Jun Pers Income +0.4%, PCE +0.2%, core PCE prices +0.1% for +1.3% yoy. These data are already all in Q2 GDP, thus should have limited mkt impact other than to indicate pattern of real PCE was slowing at EOQ. Likewise, PCE core prices were steady at +1.3% yoy in each month, with few policy implications. Pvt wages +$16b in Jun vs +$29.6b in May; supplements, proprietors income, rents, pers income receipts and transfers all gained, so consumers maintain the wherewithal to spend. Real DPI was +0.2% mom. Revisions lowered income in 2013-14. Savings rose, saving rate was 4.8% in Jun.
US TSYS/RESEARCH: Jefferies analysts said that "apathy pervades the cash T-bill market for the first time in recent memory. The short end seems to not be seeing any meaningful cash inflows lately and accordingly rates on short bill maturities have risen by 3 to 5bps. For example the 3month bill yield reached .065% at one point" last week, "whereas one month ago 3month bill yields were at .015%. The backup (at least in the shortest maturities) seems to finally have abated today as we are seeing the normal month end buying interest from the money fund community. Lastly, we are seeing yields on the year bill bounce around as market participants continually alter their opinions about the timing of any rate hikes" with bounces last Friday or so in year bill "between 0.305% and 0.345%."
US TSYS/RESEARCH: Jefferies analysts said on front-end Treasuries that "overnight Treasury General Collateral have been very firm of late, ranging" last week "between the low 0.20s and the low 0.30s. The absence of any appreciable short base, a dearth of cash, collateral settlements ($10B Tbills Thursday and $47B in month end settlements Friday) and assorted month end pressures are all contributing to the higher funding. For context, our o/n Treasury GC average" Friday to close the week was "the third highest in the past year (the two higher prints were quarter ends). Looking ahead, we expect overnight GC levels to gradually normalize over the coming week or so. Mid-market on Treasury GC for the month of August is around 0.20. This seems fair in our estimation."
US TSY/RECAP: US Tsys are mildly lower, belly underperforming while Tsy futures are mixed and flatter. Elsewhere, the USD is king vs majors, global stocks are mostly higher though China's CSI 300 was off 40 points. The commodity complex is mostly lower with gold off over $3, EGBs are down, bunds flatter, and EU peripheral spds vs Germany are near flat. Tsys gapped lower in Tokyo, reversing the late run up on Friday. Asian accts cast some doubts on Fri's ECI and trading volumes were decent considering Australia bank holiday. Flows include Asian commercial banks sales in off run 10Y and 30Y, paying 5Y swaps while Japanese banks sold 10Y, paid in 5Y swaps while credit desks sold 5Y. However, Japanese funds bought 5Y and 10Y while Japanese lifers scooped up 30Y. Caixin China mfg PMI final was weaker than exp at 47.8 vs exp 48.3. Tsys bounced a touch in early London, as the Greek stock exchange reopened down 11%, in line with ETF levels. But better Tsy sales were seen into strength with central banks selling the front end while hedgers used upticks to sell strength. Elsewhere, UK Markit PMI Mfg 51.9 vs exp 51.5. For today, Personal Income/Spending, Markit Mfg PMI, Construction Spending and ISM Mfg.
US TSYS: Commodity Futures Trading Commission/Commitment of Traders data for the period ending July 28 has been released. Net changes in the latest report showed large speculative accounts scaled back positions in the short end and reversed a modest short in the 30Y bond to net long; the group added to existing positions in the balance of the curve. In the short end, the group pared net shorts in Fed fund futures by +10,064 to finish -139,670, and pared net longs in Eurodollar futures by -136,656 to finish +65,943. In notes, the group added net longs in the 2-year by +3,320 to finish +119,643, and added to net shorts in the 5-year note by -34,515 to finish -161,967. The group continued to add to a net long in the 10-year note by +38,242 to +65,642. In the long end, the group reversed a net short in the 30-year Bond of -5,271 in the prior read to +1,158, +6,429 net, and added net shorts in the Ultra-bond by -886 to finish the latest period -46,549 (getting close to record short of -48,812 from back on March 24, 2015).
US TSY FUTURES: Overnight, volumes were slightly below avg. Some 5,077 EFRs were reported in Sep 10Y. Current volume figures and ranges noted below: Sep Ultra bonds traded in a range of 158-21 to 160-06 on volume of 5,900 contracts Sep T-bond futures traded in a range of 156-04 to 156-20 on volume of 27K. Sep 10-yr note traded in a range of 127-11.5 to 127-19.5 with volume of 179K Sep 5-yr notes traded 91K while Sep 2-yr notes exchanged 24K contracts overnight.
US TSY FUTURES: Sep Tsy futures are mixed/flatter on below avg volume: Sep Ultra bonds last up 16/32 at 160-01 Sep T-bond futures were last up 16/32 at 156-14 Sep 10-yrs are last up 1.5/32 at 127-15.5 Sep 5-yrs are last off .75/32 at 119-26.25 Sep 2-yr notes were last off .75/32 at 109-16.25
US TSYS: USTs are trading mixed Monday, with the longer-end of the curve outperforming. The yield on the benchmark 2Y was last at 0.6875%, with the 5Y at 1.55%, the 10Y at 2.195% and the Bond at 2.9075%. The curve was steeper, with 2/10s at 150.5 bps and 2/30s at 221.7 bps. Cross-border trade saw the benchmark 10-year US/German spread trading at 155 bps.
EURO SUMMARY: Euro-dollar closed in NY Friday at $1.0984 after rate had been driven to extended highs of $1.11145 on reaction to the release of the US Employment Cost Index (ECI), the weak number prompting a sharp dollar short covering reaction, which added to end month dollar sales. However, move missed retesting the Jul27 high of $1.1129, and with analysts looking through the headline number to suggest wage inflation remains strong, saw the dollar pare losses. Fed Bullard hawkish comments also aided the dollar recovery as rate dropped back to $1.0965. Asia eased rate to $1.0966 before it recovered to $1.09885 into Europe. An early dip to $1.0967 then saw rate jump to an extended high of $1.0996 but momentum quickly faded before it settled back around $1.0975. Stronger than forecast Italy mfg PMI provided some buoyancy but this was countered by French data that remained below 50.0. Stronger than flash forecast Germany and EZ data failed to counter and rate pressed through support at $1.0965/60 to $1.0957. Rate recovered late morning to $1.0974 on cross driven demand. Overall market was seen in consolidation mode, eyeing the key NFP at end of the week.
ECB: Excess liquidity in the Eurozone rose to E436.507bln Friday from E430.765bln the night before according to latest ECB figures. Use of ECB deposit facility increased to E136.985bln from E126.454bln Thursday, while use of the ECB's marginal lending facility dropped to E138mln from E190mln.
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