US GOVTS OUTLOOK: Supportive month-end session, then welcoming August

Reuters




BOSTON, July 31 (IFR) -

•	Light Summer Monday Session Underpinned by Month-end

•	August Rolls in With Refunding, Issuance and Payroll Friday

•	August Rolls Out with Jackson Hole, Debt Ceiling Angst

•	Chicago PMI, Pending Homes, Dallas Fed, t-bill Monday

In many respects global bond markets are seen entering an interlude of biding
their time. After all, it is soon to be August when most of Europe is out on
vacation and where many on the stateside of the pond do the same. Markets are
also wondering what the major central banks of the ECB and the Federal Reserve
have up their policy sleeves. Conveniently, both ECB President Draghi and Fed
Chair Yellen will be speaking later in the month at the Fed sponsored monetary
symposium in Jackson Hole Wyoming (August 24-26).

Barring any surprises on the economic data and geopolitical fronts, markets can
be expected to mainly look to keep their risk profiles lowered and their trading
powder dry in the meanwhile. Markets will also have the added trading
disincentive of the debt ceiling debate to contend with if this controversy is
expected to be dragged out to the last minute, suggesting no resolution before
the end of September/beginning of October drop-dead data being signaled by
Treasury.

In the interim, though, the market will have its usual share of scheduled
high-frequency data and other events to contend with along with a likely
unscheduled surprise or two.

This week's schedule brings a bit of volatility promise that somewhat
compromised summer liquidity may well exacerbate. Today's session's better claim
to fame is its month-end status, where passive index bond funds are seem coming
in to add duration, matching their benchmark indices. The widely followed
Barclay's Treasury index is seen extending manageable 0.06-years with these
flows expected to trickle in over the course of the day if mainly to be a
mid-afternoon happening.

The session will have a bit of economic data (detailed below) along with its
usual complement of weekly t-bill offerings, if neither one is expected to
impact the market much. Data and supply, though will be ratcheting up as the
week progresses though and can be expected to bring with it its share of
volatility. On the supply side, Treasury will be announcing the details of its
August Refunding on Wednesday morning - they will also be announcing their Q-3
borrowing estimates this afternoon.

Due to the debt ceiling issue, Treasury is expected to be conservative on both
counts, though their borrowing needs are seen as ramping higher in the quarters
ahead.  Also, seen as being a supply factor this week is the new issue corporate
market. Indeed, with much of the quarterly earnings having been announced last
week, a fair number of deals are expected. Estimates for the week suggest $30 bn
in corporate issuance.

The economic data too will be rising in importance as the week's progresses.
Tomorrow brings the all-important PCE price data for June. Expectations are for
0.1% m/m prints for both headline and core and if so bring the core y/y level in
at a subpar 1.5%. If so, this can be expected to prolong the debate if the slump
in inflation is structural or transitory. In considering inflation's prospects
though, one should note the recent weakening of the dollar as well as the
firming in oil and other commodities in general as portends supporting higher
future inflation.

The balance of the week is actually chock full of high profile data releases -
ISM, Construction, Trade, ADP - if much of the focus will be on Payroll Friday.
Consensus is looking for decently strong job print in the vicinity of +170k
replete with monthly wage gains of 0.3%.  If so, and when combined with the
following week's Refunding auctions data, that should support a continuation of
the recent range trade (2.35%-2.20% in the 10-year).

Indeed, the range trade, considering the supportive summer seasonals and general
economic and political uncertainties, is expected to persist right into the
month-end Jackson Hole event when the market can then be expected to reassess
its prospects depending on what the Fed's Yellen and ECB's Draghi have to say.

Aside from the range trade, the yield curve is seen as having better steepening
potential  as the market concerns itself with the impact of the Fed's balance
sheet unwind, along with a delay over the next Fed rate hike should inflation
readings stay soft. With economic data out of Europe, including inflation,
mainly coming in on the firm side the expectation is for European yields to
converge in on treasury yields if in a measured manner.

For now, the preferred approach is that of a neutral range trader favoring curve
steepeners and tightening spreads to core Europe.  The tactical bias is neutral
favoring the selling of strength in the range.  We look for a 2.31% to 2.25%
range in 10s. The strategic bias is flat. The curve bias is flat.

Today's events calendar should be easy to digest. At 09:45, the market consensus
has the Chicago PMI pulling back to 61.0 in July from 65.7 (a 3-year high) in
June. At 10:00, the NAR's Pending Home Sales Index for June (e: +1.0% to 109.6)
is expected to rise for the first time in four months and for the first June in
three years. At 10:30, the Dallas Fed will publish results of its Texas
Manufacturing Outlook Survey for July, last showing a general business activity
index of 15.0.

The New York Fed will purchase up to $1.575 bn of 30-year Fannie Mae and Freddie
Mac securities in FedTrade operation closing at 11:45. Treasury will announce
details of the following day's 4-week bill auction at 11:00, estimated to be
unchanged at $45 bn. Treasury will then auction $39 bn 3-month and $33 bn
6-month bills at 11:30, unchanged for a  20th straight week. The $116 bn in
coupon issuance auctioned between July 20 and July 27 will settle, paying down
$4.158 bn in debt for Treasury.  Kenneth.logan@tr.com/nt

 






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