The Market Today
President Remains Unhappy with Rate Hikes; Yield Curve Flattens Further
by Craig Dismuke, Dudley Carter
There are no reports on the calendar today.
Yesterday – Equities Gained Even As Treasury Yields Dropped to Multi-Week Lows, Curve Flattened to New Cycle Low: It was an interesting day for global markets Monday, as U.S. equities jumped early and closed near the daily highs while Treasury yields and the Dollar dropped to finish near session lows. U.S. equities rose for a second day in anticipation of a meeting between U.S. and China trade officials later in the week. That meeting, which was announced last week, will include lower level officials but is seen as a potential first step towards more top-heavy talks later in November. The S&P 500 rose 0.2% with some of the more trade-sensitive sectors—materials, energy, and industrials—near the top. But despite equities’ gains, and to the daily chagrin of those driving the record-level of net short open interest in 10-year Treasury futures, Treasury yields bull flattened and prices closed near their daily peaks. The 2-year yield dropped 2.1 bps in the rally to 2.58%, the lowest yield since July 13. The 5-year yield dropped 4.4 bps to close at 2.70%, the lowest since June 27. The 10-year yield fell 4.2 bps to 2.82%, the lowest since May 29. The spread between 2s and 10s dropped to a cyclical low of 23.2 bps. The Dollar was also weaker and closed at its daily lows, accelerating an early-morning downtrend after a report indicated President Trump remains unhappy with how the Fed is carrying out its monetary policy (more below).
Overnight – Treasury Yields Bounce as Stocks Extends Monday’s Advance: Global stocks have improved for a second day on Tuesday and Treasury yields have pushed higher to undo a portion of yesterday’s decline. Nonetheless, the Dollar weakened for a fifth consecutive session amid the U.S.-China trade hopes and following the President’s Fed remarks (more below). Chinese shares were again leading all major global indexes with a nearly 2% rise on Tuesday. The Stoxx Europe 600 had gained 0.3% to a five-day high with 11 of its 12 sectors positive for the day. U.S. futures were signaling a modest 0.2% continuation of yesterday’s gains. Global sovereigns were also in a risk-on mood with prices on some of the non-core countries’ debt outperforming. The 10-year yields in Italy (-4.7 bps), Spain (-2.6 bps), Portugal (-2.9 bps), and Greece (-8.1 bps) were all lower while the U.S. 10-year yield had moved up 1.6 bps to track moves in the U.K. (+3.0 bps), France (+1.2 bps), and Germany (+1.9 bps). The Dollar, which had been propped up recently by concerns around Turkey and U.S.-China trade, dropped to its weakest level in nine days as those pressures eased and the president reiterated his frustrations with the Fed.
President Trump Pushes Back on the Fed Again: President Trump’s public disagreement with the Fed’s continued tightening was back in the headlines Monday. An early-morning report indicated the President told a group of donors over the weekend that he was displeased that Fed Chair Powell hadn’t turned out to be a “cheap-money” Fed Chair. Then on Monday, he told Reuters that “I’m not thrilled with [Powell] raising of interest rates, no. I’m not thrilled. …We’re negotiating very powerfully and strongly with other nations. We’re going to win. But during this period of time I should be given some help by the Fed. The other countries are accommodated.” According to Reuters, when asked if it was important for the Fed to be independent, he responded “I believe in the Fed doing what’s good for the country.” The Fed is expected to raise rates again when they meet later in September. While the president has little he can do regarding Powell, apart from firing him which would be very risk for financial market stability, there remain four vacant Fed Governor positions allowing the president to still shape the biggest block of policy voters. Three people have already been nominated but Goodfellow’s Senate approval appears stalled. Clarida and Bowman are still in-progress.
Bostic Will Dissent if Faced with Curve-Inverting Rate-Hike Vote: Atlanta Fed President Bostic (2018 voter) said the economy is “strong” and unemployment is “very, very low” compared with historical levels. As a result, the Fed has continued along its “gradual walk” back towards a neutral setting. He said that his base case was still for only one more rate increase this year, three total for 2018, but added a caveat for caution around the shape of the curve. Bostic said “An inversion doesn’t guarantee anything,” but added “I pledge to you I will not vote for anything that will knowingly invert the curve and I am hopeful that as we move forward I won’t be faced with that. …The market is going to do what the market does, and we have to pay attention and react.’’