Prior Week Summary
The strength of the July jobs report took short-end yields meaningfully higher as the market begins to pull forward the timing of the next expected Fed tightening. The curve continues to trade directionally with rates, and the 2s/10s spread widened to 86 basis points to end the week. The much anticipated jobs report detailed that the economy added 255 thousand jobs in July, following an upwardly revised gain of 292 thousand jobs in June. The fears of a weakening labor market, that were set in motion from the exceptionally weak May report have largely been put to rest with these two strong consecutive reports. Additionally, the report highlighted a better-than-expected increase in average hourly earnings, and a longer average work week.
Separately, The Bank of Japan unveiled a ¥7.5 trillion fiscal stimulus package aimed at spurring domestic growth after the Japanese economy has failed to gain. The stimulus package widely underwhelmed investors, as many economists believe the package will only moderately increase economic growth.
Also, The Bank of England cut its overnight lending rate by 25 basis points from 50 to 25 bps in a move widely expected by the market. Speaking on the reason for the cut, Mark Carney, Bank of England governor, stated, “Indicators have all fallen sharply, in most cases to levels last seen in the financial crisis, and in some cases all-time lows.” The Bank of England plans to buy £60b of government bonds and £10b of corporate debt, as policy maker’s fears of a Brexit-triggered downturn for the U.K. economy strengthen. The Bank of England also cut the 2017 growth forecast from 2.3% to .8%, and highlighted that “a majority of members expect to support a further cut in bank rate to its effective lower bound”.
The Look Forward
The market will get a new insight into consumer strength with updated information on retail sales, wholesale inventories, and consumer sentiment. Also, a good amount of duration comes to the market this week with the Treasury scheduled to auction $24b in 3yr notes, $23b in 10yr notes, and $15b in 30yr bonds.