Curve Steepens Again on Eve of Jobs Report

The gap closes. Swap rates and Treasury yields continued their significant steepening today, the 2s10s inversion now at -71bps, the tightest spread seen since May. Several events have spurred the steepening: Japan’s yield curve control changes, higher issuance of long-dated Treasurys, and Fitch’s U.S. credit downgrade. Elsewhere, the standalone 10-year UST yield rose ~10bps today, cementing a ~20bp rise since the week’s open, while the 2-year yield has remained flat throughout. The move higher makes tomorrow’s nonfarm payrolls report all the more important, as a weak payrolls number could spark a significant rally.

Host of data releases send positive economic signals ahead of tomorrow’s labor data. Service sector activity in the US continued to expand in July according to S&P PMI data released today. Fourteen industries including construction, accommodation, and food services reported growth and “the majority of respondents are cautiously optimistic about business conditions and the overall economy,” said the Chair of the ISM Services Survey Committee in a statement. Durable Goods orders, a key indicator of economic health and a subset of Factory Orders, were slightly lower than last month at 4.6% but still expanded at a brisk pace, led by Transportation Equipment. Tomorrow’s data will be headlined by nonfarm payrolls, where the market expects jobs growth to persist, which would further support a soft-landing narrative.

BOE hikes to a new 15-year high. The UK central bank hiked their policy rate 25bps to 5.25% today, an expected slowdown from June’s 50bp hike. The hike deceleration came after June’s inflation data declined to 7.9%, a welcomed print after months of hot inflation readings. Meanwhile, policymakers added a new line into the guidance, saying that rates will be “sufficiently restrictive for sufficiently long.” The BOE added that key indicators “suggest that some of the risks from more persistent inflationary pressures may have begun to crystallize.” The BOE’s next meeting will come in September, where they will have two more months of inflation data to weigh before deciding the path forward.