Bond Market Insights: Fri, 01 Aug 2025

Risk off. Sticky inflation, a hawkish FOMC hit the two crowded trades; short USD and curve steepeners, 2s10s now testing 40bps, the flattest since April, as front-end yields approached 3.95%. SOFR Dec 25 futures (SFRZ5) fell below 96.00, (implying 4%) while SFRH6 (Mar 26) has dropped over 14 ticks since the Fed meeting.

Core PCE came in at +0.3% m/m (2.8% y/y), matching expectations but showing some upward revision pressure from prior months. Q2 employment cost index also ticked up slightly more than expected at +0.9%, suggesting wage growth. Jobless claims remained stable, and the 4 week moving average hit its lowest level since mid-April. The Atlanta Fed’s GDPNow model now forecasts 2.3% Q3 growth, good enuf.

Equities opened firm on the back of strong earnings from Microsoft and Meta but faded through the session. The S&P 500 fell 0.4%, and Nasdaq lost 1.5% from overnight highs as traders braced for Apple and Amazon earnings. Volatility declined, with 3m10y swaption vol dipping to its lowest since early 2022. Meanwhile, the dollar remained well bid, with the Dollar Index, DXY, closing above 100.

German CPI undershot at 1.8% y/y. China’s manufacturing PMI disappointed at 49.3, weighed down by weak exports and weather-related disruptions. Non-manufacturing also slipped to 50.1. The Bank of Japan held rates steady as expected, but flagged rising inflation risks. Many see the door opening to a potential October hike, especially after the upward revision to its inflation forecast.

Australian data surprised to the upside. Retail sales jumped 1.2% in June (vs 0.4% expected), while building approvals surged 11.9%. The RBA is still on track for modest real consumption growth, and nothing in the latest batch points to downside risks to that outlook. This was the final release of the retail trade survey after 74 years of history, it is going to be replaced by a broader household spending indicator.

All eyes now on July U.S. payrolls. Consensus expects 104k, but expectations vary widely. The unemployment rate is being forecast either side of June’s 4.1% as the market is conflicted over labour demand resilience and potential declines in labour force participation.

Today we get U.S. ISM manufacturing and the final read on University of Michigan consumer sentiment. It is PMI day, with data from Europe, the UK, and Asia