The Market Today
News on China Disrupts Overnight Session, Bullard Says Fed Should Stand Down
by Craig Dismuke, Dudley Carter
Bullard Says Fed Should Stand Down With Respect to Future Rate Increases: There are no economic reports scheduled for Friday but St. Louis Fed President Bullard is currently speaking at a breakfast event in Kentucky. Bullard has been vocal in pleading with his Fed colleagues to hold off on any more rate hikes. In a WSJ interview in late June, Bullard said “I just don’t think monetary policy has to push so hard to invert the yield curve and test out the idea of whether this time is different or not. A simple idea about what the yield curve is telling us is that the short end is controlled by the central bank, but the long end is more of a market signal about where the market thinks the economy is going, especially with respect to inflation. And the market just don’t see that much inflation pressure going forward, even though they think the Fed is going to be more dovish than we say we’re going to be.”
In this morning’s remarks, Bullard doubled down on these beliefs:
- “Events have transpired that have flattened the yield curve further, and imminent yield curve inversion in the U.S. has become a real possibility.’’
- “There is a material risk of yield curve inversion over the forecast horizon if the FOMC continues on its present course.”
- “Yield curve inversion is a naturally bearish signal for the economy. This deserves market and policy maker attention’’
- “Given tame U.S. inflation expectations, it is unnecessary to push monetary policy normalization to such an extent that the yield curve inverts’’
Yesterday – Dollar Sank After the President Said He Doesn’t Agree with Fed Rate Hikes: Treasury yields fell flatter Thursday as stocks weakened and currency traders had their lunch breaks disrupted by a sharp sell-off of the U.S. Dollar. Pre-market futures predicted the weakness that left the Dow down 0.5% and the S&P 500 and Nasdaq 0.4% lower. Nine of 11 S&P 500 sectors were negative with the only two to finish up, real estate and utilities, those that benefit from falling rates. The Treasury curve did shift lower as an almost uninterrupted downtrend that began around 6 a.m. CT ultimately knocked 1.9 bps from the 2-year (2.59%) and 3.1 bps from the 10-year (2.84%). The 10-year yield had earlier climbed to 2.895%, its highest level since June 26. As a result, the 2s10s spread fell back below 25 bps. The Dollar finished up but well off its highs that had taken the U.S. currency to its strongest level in more than a year. At 12 p.m. CT, the Dollar sank after the President said in a CNBC interview that “I’m not thrilled” that the Fed is raising rates “Because we go up and every time you go up they want to raise rates again. I don’t really — I am not happy about it. But at the same time I’m letting them do what they feel is best.” The White House released a statement that “Of course the President respects the independence of the Fed.”
Overnight – U.S. Assets Hit By China News: Tick-by-tick charts of U.S. equity futures and Treasury yields highlight the two noteworthy overnight stories. Just after 8 p.m. CT, futures tumbled and Treasury yields spiked lower after the PBOC set the yuan’s reference rate to 6.7671 per U.S. Dollar, the weakest in just over a year. The 0.9% daily depreciation in the peg was the largest since the week following Brexit (June 2016) and extended what has been a precipitous decline for the Chinese currency. Since June 15, the Dollar is up more than 5% against the yuan. Asian stocks responded by selling off but recovered sharply, with China’s CSI 300 finishing up 1.9%. The recovery occurred on reports Chinese banks stepped in to stabilize the currency by selling U.S. Dollars. After a slow recovery back to almost unchanged, U.S. equity futures crumbled back to their lows just after 5 a.m. CT. President Trump said in a pre-recorded CNBC interview that he’s “ready to go to 500”, referring to the amount of Chinese imports he could subject to tariffs. Two weeks ago the President remarked he would be okay with affecting the full balance, which totaled $505 billion in 2017. Equity futures were back off the lows but Dow and S&P 500 contracts remained negative. The 2-year Treasury yield was flat at 2.59% while the 10-year yield had added 1.5 bps 2.85%.
ICYMI – Vining Sparks on CNBC: Vining Sparks’s Chief Economist Craig Dismuke appeared on CNBC’s Worldwide Exchange Thursday morning to discuss the current strength of the U.S. economy and the recent flattening of the U.S. yield curve. A potential curve inversion has become a major topic of debate among financial experts and drew comments from top policy officials earlier this week, including current Fed Chair Jay Powell, former Fed Chair Ben Bernanke, and top White House economic advisor Larry Kudlow. Click here to view a clip from that interview. For a more in-depth look at the yield curve and lessons gleaned from previous inversions, click here to view Vining Sparks’s The Implications of an Inverted Yield Curve or here for a replay of the Vining Sparks 3rd Quarter Economic Outlook webinar.