Treasuries and U.S. equity futures are little changed on what has been a relatively quiet morning thus far. The yield curve (2yr/10yr spread) is 6 basis points steeper since Friday morning (0.30% currently). There was a bit of noise in currency markets overnight, with China’s yuan weaker and Japan’s yen stronger versus the dollar. The latter is attributable to a Friday article suggesting the Bank of Japan is considering changing its Yield Curve Control policy at the July 31 meeting. On the trade front, President Trump and Jean-Claude Juncker from the EU will meet on Wednesday to discuss potential auto tariffs proposed by the White House. Auto industry lobbyists have appealed to the Trump administration in strong opposition of such measures. This week’s economic calendar is highlighted by the release of the first estimate of Q2 GDP on Friday (4.2% expected). June durable goods orders will be released on Thursday, and there are no scheduled appearances this week from Fed leaders (currently in blackout period ahead of August 1 meeting).
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ALM First Daily Market Commentary: July 19, 2018
Treasuries are unchanged to slightly lower (price) at the moment, but equities are generally weaker on trade concerns (S&P 500 futures -8 points). The European Union (EU) is reportedly preparing a new list of American products to hit with retaliatory tariffs in anticipation of the White House’s proposed auto tariffs. EU leader Jean-Claude Juncker is scheduled to meet with President Trump at the White House on July 25, and Juncker is expected to make a series of trade proposals aimed at dissuading the president’s auto tariff threats. The Wall Street Journal is reporting that the auto industry (including U.S. companies) is lobbying the Trump administration against these proposed tariffs on auto imports, arguing that the policy will lead to higher prices and lost jobs.
Another concern for market participants is the ongoing decline in commodity prices, particularly metals. The Bloomberg Commodity Index is down 10% since late May, and the move coincides with a weaker Chinese renminbi (yuan) and stronger dollar, as well as uncertainty regarding Chinese demand amid ongoing trade tensions. Some are suggesting that the sharp decline in commodity prices is overdone, but others suggest that prices of metals, in particular, are predictive of the pace of global growth. The volatility in commodity and currency markets has yet to spill over into U.S. rate markets, and a calming of trade tensions would likely spark a relatively strong rally in commodities (and USD softening).
ALM First Daily Market Commentary: July 18, 2018
The overnight trading session saw Treasuries rally modestly in response to inflation data coming in lower than expected in Europe in addition to weakness in equity markets, with both Dow and S&P 500 futures pointing to a lower open this morning. The dollar rallied after Fed Chairman Powell provided a rather sanguine assessment of the US economy in his Congressional testimony yesterday. But the Chairman did give the central bank some flexibility in terms of rate hikes, saying that the Fed would continue to gradually raise rates for now.
On the data front, US Housing Starts came in lower than expected and dropped to the slowest pace in nine months. The slowdown is most likely in response to higher mortgage rates, as 30-year mortgage rates sit at the highest level since 2014, increased materials cost, and a scarcity of qualified construction workers. The decline may signal a slowdown in the housing market greater than previously expected. However, it is important to note that this data point is volatile and can be subject to significant revisions.
ALM First Daily Market Commentary: July 17, 2018
There was better demand for Treasuries overnight from Asian investors, but the market is fairly quiet this morning ahead of Powell’s testimony before the Senate at 10am ET. There will be a particular focus on the Q&A session following his opening statement given Powell’s propensity to be a bit more forthcoming than his predecessors. That said, it would be surprising for the Fed chair to veer much from the Fed’s recent talking points (e.g., continued gradual normalization), but he will likely be pressed hard for his assessment of recent trade tensions as it relates to growth and monetary policy expectations. President Trump’s news conference with Russia’s Putin yesterday dominated news wires yesterday (and this morning), with bipartisan condemnation for some of Trump’s comments/positions, but the markets appear to be shrugging off the event for the most part (more focused on growth and monetary policy). Global equity markets are mixed today, and S&P 500 futures are currently down 4 points.
ALM First Daily Market Commentary: July 16, 2018
Treasury prices are modestly lower following a quiet overnight session (Japanese markets closed for holiday). Chinese economic data was mixed, with Q2 GDP in line with expectations and June industrial production weaker. In the U.S., the June retail sales report included upward revisions to the May data of 30-50 bps, but the June control group figure was flat versus expectations of a 0.4% gain. The control group is the metric used in the GDP calculation. The rest of the week will be relatively quiet from a data perspective, but the markets will be paying close attention to Fed Chair Powell’s semi-annual Congressional testimony, beginning with the Senate Banking Committee tomorrow morning.
The slope of the yield curve continues to be a popular topic of discussion in the markets, with the 2-year/10-year spread now at just 24 bps. An inverted yield curve has preceded each of the last 5 recessions, but the timing has varied from 10-22 months between the inversion date and the beginning of the recession. For example, the curve last inverted in 2006, but the economy continued to expand for another 22 months. Additionally, the 1994-95 Fed tightening cycle is the only one in modern history to not result in an inverted curve, although it got very close (2yr/10yr spread of 7 bps in late 1994). Some would argue that the current flattening has been exacerbated by central bank purchases of long-term bonds. These purchases have been made independent of any value metrics, and term premiums for 10-year Treasuries have actually been negative in recent years. As the Fed reduces its bond portfolio, term premiums should theoretically expand, which could relieve some of the downward pressure on long-end yields.
ALM First Daily Market Commentary: July 13, 2018
Treasury prices were slightly higher overnight following President Trump’s criticism of British Prime Minister May’s current Brexit plan, suggesting that it will make a U.S./U.K. trade agreement more difficult going forward. The pound sterling is 50-60 bps weaker versus the dollar following the comments, and S&P 500 futures are essentially unchanged at the moment. China’s trade surplus with the U.S. hit a record high in June, with exporters likely rushing to beat any new tariffs from the U.S. The same report showed weaker Chinese imports, which is a sign of slowing consumer demand in the world’s second largest economy. Next week’s economic calendar will be headlined by the June retail sales report (Tuesday) and Fed Chair Powell’s semiannual testimony before Congress (Tuesday and Wednesday).
ALM First Daily Market Commentary: July 12, 2018
Treasury prices are slightly lower this morning amid improved sentiment in global risk markets overnight. All major overseas equity indices are in the green today (Nikkei +1.2%, Shanghai +2.2%, Euro Stoxx +0.5%), and S&P 500 futures are currently up 17 points. Trade is still the biggest driver of current market swings, and headlines today suggesting U.S. and Chinese officials are willing to resume negotiations is the primary source of today’s action. ECB President Mario Draghi reportedly warned EU leaders that the economic impact of recent tariffs remains unknown, but he also noted that the central bank is concerned of stagflation risks (slowing growth coupled with price inflation). On the data front, headline CPI rose 0.1% in June, and excluding food and energy, core prices were up 0.2% m/m. On a year-over-year basis, headline CPI was up 2.9%, and core CPI rose 10 bps to 2.3% (as expected), the highest reading since January 2017.
To view ALM First’s full daily market commentary, please click here.
ALM First Daily Market Commentary: July 11, 2018
Trade war tensions have resurfaced with President Trump aiming to impose tariffs on another $200 billion of Chinese goods. As a result, equity and commodity markets sold off overnight while the dollar strengthened. Chinese officials vowed to lodge complaints at the World Trade Organization but did not provide any details on what they would do in retaliation.
On the data front, this morning’s release of PPI came in better than expected at 0.3% versus 0.2% expected. Core PPI, which excludes food and energy, came in at 0.3% as well beating expectations by the same margin as the headline reading. The index rose 3.4% year-over-year, the fastest pace since November or 2011. The numbers show that inflation in the production pipeline are firming in response to higher tariffs as well as increasing demand.
ALM First Daily Market Commentary: July 10, 2018
Treasuries continued yesterday’s sell off as equity markets moved higher following the continued lull in trade war rhetoric since last Friday’s imposition of tariffs between China and the US. Given that the Trump administration is now turning its focus on the Supreme Court pick as well as the upcoming trip to Europe, the market will shift its attention to the upcoming earnings season; a welcome respite from the recent trade war talk.
To view ALM First’s full daily market commentary, please click here.
ALM First Daily Market Commentary: July 9, 2018
The Treasury curve is a bit steeper and higher this morning, with the spread between the 2 and 10-year part of the curve up about a basis point, but still sits at around 29 bps which is around the lowest level since 2007. The selloff in rates was sparked by an increase in optimism in risk markets as investors decided to shift their focus to the upcoming earnings season.
The calendar is light today, but Mario Draghi’s address to the European Parliament on Monday should garner attention from the markets looking to glean any information regarding the timing of a rate increase in 2019. Additionally, this Thursday, the Bureau of Labor Statistics will release CPI data for June with the market expecting a 0.2% increase in both headline and core inflation readings.
To view ALM First’s full daily market commentary, please click here.