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Still Bid, Tsys Scale Back Knee-Jerk Bid on Mildly Softer Data

US TSYS
  • Treasury futures remain in positive territory, off early session highs following a knee-jerk bid on lower than est Employment Cost Index gains 1.0% vs. 1.1% est, Core PCE 4.1% vs. 4.1% est.
  • Still firmer, rates quickly pared the gap move as markets deemed it an overreaction to near in0line figures. Services saw a mild acceleration from 0.25% to 0.275% M/M but importantly the Fed’s preferred indicator of core non-housing services eased a tenth to 0.22% M/M. Softer ECI data an afterthought while benign price pressure evinced from UofM survey helped buoy rates back to middle of the range.
  • Note, Tsy curves have reversed course from early steepening to mildly flatter (2s10s -.255 at -93.704 vs. -86.190 high) as short end rates lagged the rally in intermediates. As such, rate hike projections through year end remained subdued (18-36% chance of 25bp hike before year end). Markets much more eager to price in rate CUTS in 2024 (first 25bp cut in May '24, second in July'24.
  • Focus turns to next week's ISMs on Tue (Mfg 46.98 est, prices paid 44.0 est), ADP on Wednesday (+188k est vs. 497k prior), and July employment data next Friday, current estimate of +200k job gains vs. +209k in June.
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