The Market Today
Trade Talks, Brexit, and First Rate Cut in 10-Years Possible
by Craig Dismuke, Dudley Carter
This Week’s Calendar – Fed Poised to Cut Rates for First Time in 10 Years: This week’s calendar is full of important data including personal income and spending, consumer confidence, PCE inflation, the ISM Manufacturing index, construction spending, auto sales, and the July jobs report. However, the most important event will be the FOMC policy decision on Wednesday. Markets expect a 25 bps cut with just a 20% chance of a 50 bps cut. There is some speculation that officials will alter their current plan to end portfolio run-off before the currently scheduled September conclusion. However, most important is the nature of the cuts. The data do not point to this being in response to an imminent economic downturn; but, rather, an insurance cut to boost a soft economy as it weathers heightened uncertainty. As such, the scope of the cuts is likely to be limited to 25 to 50 bps.
Today’s Calendar – Trade Talks Resume and Brexit in Focus: Today’s calendar is the only respite from the busy week with just the Dallas Fed Manufacturing Activity index scheduled for 9:30 a.m. CT. However, while the economic calendar starts slowly, U.S. trade negotiators are traveling to Beijing today (more below) and Brexit is once again in focus with the installation of Boris Johnson as Prime Minister. One of Johnson’s top aides told a British paper over the weekend that they were working under the assumption that a deal with the E.U. would not be reached. This sent U.K. 10-year yields down 4 bps to 0.64%.
Overnight – Treasury Yields Tick Lower As Trade Negotiations and Dual Mandate Update to Give Important Context to Fed’s Probable Rate Cut: Global markets opened hesitantly Monday and were pointing in different directions as investors await the restarting of trade talks and a slate of key U.S. economic reports that could provide important context to the Fed’s probable rate cut on Wednesday. Key reports this week are expected to show stable hiring and a rebound in consumer confidence and inflation. That would follow a string of recent U.S. economic reports that have been relatively upbeat and Friday’s GDP report which showed growth in the second quarter was stronger than expected. However, an uptick in domestic sentiment isn’t expected to keep the Fed from lowering its target rate when it gathers Wednesday amid low inflation and worries about uncertainties emanating from abroad. Trade tensions are among the biggest clouds the Fed sees overhanging the outlook, and this week’s trade gathering in China is unlikely to bring much bluer skies. U.S. trade negotiators are expected to fly to Beijing today to restart face-to-face negotiations, but unearthing new common ground isn’t considered the most likely outcome. White House advisor Kudlow said last week the U.S. team, “will put forth the view we’d like to go back to where we were last May, where we did not have an agreement but we seemed to be about 90% of the way there.” Stocks in China weakened Monday while Europe’s Stoxx 600 rose and retested its year-to-date high from earlier this month. U.S. futures were little changed around 7 a.m. CT while Treasury yields had ticked lower. The 2-year yield was 1.2 bps lower while the 10-year yield had dropped 1.8 bps.
ICYMI – Vining Sparks Weekly Recap – Yields Unmoved by Mixed Earnings, Better Economic Data, Anticipation of Monetary Easing (Not Just from the Fed): The 10-year Treasury yield ended the week at 2.07%, 2 bps higher than the open, as investors kept focus on this week’s FOMC decision. The economic data were slightly better (excluding housing) with durable goods orders showing signs of rebounding business investment in equipment and the 2Q GDP report proving stronger than expected. Consumption jumped 4.3% and government spending saw its best quarter since 2009 to drive growth up 2.1%. The biggest move for the 10-year (see Chart of the Day) came when the ECB policy decision was announced. Officials succeeded in surprising markets in their dovishness but President Draghi lost that message when he said that any cuts would be accompanied by “mitigating measures.” It is unclear what this meant but implied a lack of confidence in simply cutting rates (this seems natural when rates have already been cut to -0.40%).