• US Treasury prices rise on weaker-than-expected US Q2 GDP growth
• Chicago PMI and Michigan Confidence Index both come in better than expected
• Eurozone unemployment remains at 10% and inflation increases to a 20-month high
• Russian central bank leaves key interest rates unchanged
• Ukraine makes a key policy move by raising its retail gas prices by 50% effective 1 August

Treasury prices rose on Friday as US Q2 GDP figure came in weaker than expected. The US Commerce Department reported that the US GDP in Q2 had risen 2.4% quarter-on-quarter (QoQ), less than market expectations of a 2.6% increase. However, GDP growth for the first quarter was revised upwards to 3.7% QoQ from the previously reported 2.7%. Consumer spending, which accounts for about 70% of the GDP, slowed to a QoQ growth rate of 1.6%, from 1.9% in the previous quarter. The report also shows a rise in government consumption and private investment, while a rise in the trade gap (trade deficit) reduced the GDP by 2.8%, which was the the biggest reduction since 1982. The Commerce Department also reported that the US GDP had shrunk by 4.1% between Q4 2007 and Q2 2009, higher than the previously reported 3.7%, indicating that the recession was deeper than previously thought.

Though Friday’s GDP report was an advance estimate from the Commerce Department and will be revised towards the end of August as more information becomes available, the report will reignite concerns at the Federal Reserve and among economists that the US economy is losing momentum, prompting debates on what actions should be taken if the slowdown continues. In any case, Friday's US GDP report increases the chances of low yield US yields for a long time.

2Y notes rose 2/32 to yield 0.550% (versus 0.582% on Thursday), while 5Y notes were up 10/32 to yield 1.598% (1.663%). 10Y notes rose 20.5/32 to yield 2.907% (2.981%). 30Y bonds were up 1-19.5/32, yielding 3.989% (4.079%). For the week, 2Y, 5Y, 10Y and 30Y yields fell by about 6 basis points (bp), 17 bp, 9 bp and 3 bp respectively. The 2–10 yield curve flattened by about 3 bp to 238 bp. The VIX volatility index closed at 23.50, compared to 24.13 on Thursday. September crude oil futures rose 59 cents to USD 78.95 a barrel. Spot gold rose USD 12.75 to USD 1,181.00 a troy ounce, while COMEX gold for December delivery increased USD 12.70 to USD 1,183.90 a troy ounce

The Chicago Purchasing Managers Index (PMI) released by the Institute of Supply Management rose to 62.3 in July from 59.1 from June, better than the expected 56. Meanwhile, the University of Michigan Confidence Index (final reading) for July came in at 67.8, better than the expectation of 67 but lower than June’s reading of 76. The preliminary reading reported earlier was 66.5.

The Eurozone’s unemployment rate remained steady at 10% in June for a fourth straight month, according to the European Union Statistics Office. Consumer prices, however, rose 1.7% in July on rising energy costs. This is the highest level since November 2008, but is in line with market expectations.

The JP Morgan EMBI Global Diversified index closed at a record high of 532.81 compared to 532.15 on Thursday. The JP Morgan EMBIGD sovereign spread widened about 8 bp to 310 bp.

Russia’s central bank has left its main interest rates unchanged, as expected. Bank Rossii maintained the refinancing rate at a record low 7.75% and also left the repurchase rate on one and seven-day loans unchanged at 6.75%. The bank last cut rates in May. Bank Rossii’s decision is based on the “positive trends” seen in macroeconomic indicators and “significant signs of recovering economic activity.” It added that the current level of rates will be acceptable for “the coming months,” provided these trends remain unchanged.

Ukraine increased its retail gas prices by 50% on 1 August. The policy action is in compliance with the International Monetary Fund (IMF)’s USD 15.15 bn stand-by loan agreement and the hike was steeper than the 20% increase the Ukrainian government had initially proposed. The tariff increase would increase domestic inflation, which is estimated to reach about 10% at year-end 2010, up from 6.9% in June. The tariff increase should also help the state energy company, Naftogaz, to recover a higher share of its costs, balance its book and to phase out future state subsidies. We view the news as credit positive to Eurobonds issued by Naftogaz.

Today, the ISM Manufacturing Index (54.0) and construction spending (–0.5% MoM) will be released.

[Credit Suisse]