* The working down of backlogs, together with specific strength in housing and transportation-related goods, made for a giant burst of strength in the Institute For Supply Management's July report on U.S. manufacturing, according to survey chief Bradley Holcomb. "Sixty-five is a crazy number," Holcomb told MNI in a phone interview Wednesday, referring to his report's production index which is up 11.6 points to 65.0 to show the greatest rate of monthly growth since 2004. The U.S. manufacturing ISM rose to 55.4 in July after a reading of 50.9 in June, a solid upside surprise relative to our forecast and the consensus (both 52.0). There were also impressive readings in the new orders (58.3, previous: 51.9) and employment (54.4, previous: 48.7) indices.
* The final Markit U.S. manufacturing Purchasing Managers' Index signaled the strongest manufacturing expansion in four months during July. At 53.7, up from an eight-month low of 51.9 in June and above the earlier flash estimate of 53.2, the PMI suggested a solid improvement in overall manufacturing business conditions.
* Initial claims for U.S. state unemployment benefits fell more than expected in the July 27 week to their lowest level in five and a half years, declining by 19,000 to 326,000, the Labor Department reported Thursday. This is the lowest level since the week of January 19, 2008, when it came in at 321,000. A Labor Department analyst said no states were estimated in the current week. As for the volatility common to July data, "that's still true," he said. "How much longer is it going to last? I'm not sure," the Labor Dept. analyst added.
* U.S. construction spending fell 0.6% in June after two months of solid improvement, data released by the Commerce Department Thursday morning showed. The report showed considerable weakness in housing construction, suggesting that the recent momentum in the market could be abating. Residential construction spending fell 0.1%, with the public component shedding 2.0% and private spending unchanged over the month, the lowest monthly change since October 2012. New single-family construction fell 0.8%, while multi-family dropped 3.3%.
* Markets are currently pricing in interest rate hikes by the Federal Reserve faster than the central bank itself "is signaling is likely," PIMCO Portfolio Manager and Market Strategist Tony Crescenzi told MNI. He also pointed out that the Federal Open Market Committee's statement Wednesday at the conclusion of its two-day meeting "showed no effort to dissuade investors from speculating on a tapering of monetary policy in September, so it appears the Fed remains on the taper trail, even if dependent upon upcoming data, in particular upcoming employment data." That being said, the calm that has returned to the bond market is likely to remain, which would support a steep yield curve, Crescenzi said.
* Confirming a trend that new drilling technology continues to reinforce, the U.S. Energy Information Administration Thursday morning said proven oil reserves expanded by 15%, a second year of record increase, while proven natural gas reserves rose 9.8%, just short of a record gain. The level of proven reserves of natural gas of the type found in shale formations, where new types of "fracking" technologies are effective, reached a record 348.8 trillion cubic feet. The level of proven oil reserves rose 3.8 billion barrels to 29.0 billion barrels.
* Just minutes before convening for a previously scheduled bipartisan lunch Thursday before the start of the August recess, Senate Democratic and Republican leaders clashed sharply over the central fiscal issues that will dominate the fall, including fiscal 2014 spending bills, sequestration, the debt ceiling, and tax reform. In back-to-back briefings after Senate Republicans blocked the FY'14 transportation bill, Senate Majority Leader Harry Reid and Senate Minority Leader Mitch McConnell hammered away at each other and indicated that a difficult fall looms on fiscal issues.
* Prices of U.S. Treasury debt ended Thursday lower, sliding in a multi-part selloff amid stronger U.S. economic data and given short positions being done into the week's key data, the Friday 8:30 a.m. ET U.S. nonfarm payroll employment data.
* The stars were clearly aligned for better risk sentiment Thursday, with most major global data sets and events of the day pointing to further economic recovery. If this trend continues, with an upbeat July U.S. non-farm payroll release Friday, global investors will gear up for higher U.S. interest rates and a higher dollar, if as expected, U.S. outperformance underpins the greenback.
* The euro has been bid versus the dollar because of a renewed belief in a modest recovery in the region as well as over-positioning in the dollar, whereas Aussie-dollar is offered versus the dollar, with Aussie weighed by its exposure to China. Dollar-yen, closing at Y99.50 (range Y97.66 to Y99.57), tracked U.S. yields higher over the course of the day, but also was driven by yen specific factors.
* A modest list of new investment-grade corporate bond sales surfaced Thursday, while some upbeat domestic data spurred further fears about rising U.S. interest rates. Among the deals listed, Credit Suisse Group AG and New Jersey-based biopharmaceutical firm Celgene Corporation each graced the docket with fresh, high-grade debt offerings. However, the relatively low level of new issuance Thursday could indicate a more positive U.S. July employment report Friday, and a potential spike in interest rates, traders said.
* Commodity prices were fairly buoyant Thursday, with the exception of gold, which continued to be shunned as a hot potato. Global investors' fingers were generally still too badly burnt from the past year's tumble and lackluster trading action. NYMEX September light sweet crude oil futures settled up $2.86 at $107.89 per barrel Thursday, after trading in a $105.10 to $108.06 range.
* The New York Federal Reserve bought a net $15.5 billion Agency mortgage-backed securities in the week ended July 31 under its combined QE3 and monthly prepayment reinvestment programs. Since mortgage rates have risen about 100 basis points in the last month or so, the mortgage originators are selling more 30-year "to-be-announced" or TBA paper with 4.00% coupons into the market so that is what the Fed continues to buy.
* Finance Minister Guido Mantega Thursday in a press conference in Brasilia announced a reduction in import tariffs on various raw materials and capital goods. Mantega said the higher tariffs, imposed September 2012, were intended to protect local producers from the impact of an "overvalued" currency, but "now the currency is no longer overvalued, they are no longer needed."
* Brazil's government supports the International Monetary Fund's program for Greece and the loan disbursement approved this week, and its executive director at the fund, "erred" in abstaining for the vote that approved it, a press spokeswoman said Thursday. She said the government has recalled Paulo Nogueira Batista, who represents 10 countries before the IMF executive board, including Brazil. The official abstained from Monday's board vote to approve the quarterly review of program and release the next 1.72 billion euros in financing for Greece.
--MNI Washington Bureau; tel: +1 202-371-2121; email: dgulino@mni-news.com