China’s Currency Problem and Market Volatility will Drive Treasury Action

Oct 15, 2018
Currency Us and China

Market Volatility and China

Treasury action this week will be driven primarily by two factors with economic releases taking a back seat for now. The two factors are whether market volatility carries over into this week, and whether the U.S. declares China a currency manipulator. As to the volatility question, in February the major indices lost nearly 10% before stabilizing. We’re a few percentage points from that territory now but if we challenge the February performance expect more flight-to-safety trades into Treasuries.  Also, while Treasury staff have concluded China is not manipulating its currency, Treasury Secretary Mnuchin will have the opportunity to side with his staff, or the president, who seems inclined to turn up the heat some more on China. If that happens expect more flight-to-safety trades into Treasuries.



Short-Term Rates

Short-term Rates

Economic Calendar

Economic Calendar


Top Events of the Week Top 5 Events for the Week

OCT 15-19,  2018

1.  Market Volatility — All Week
2.  FOMC Meeting Minutes — Wednesday
3.  Retail Sales — Monday
4.  September Existing Home Sales — Friday 
5.  September Housing Starts — Wednesday


1.  Market Volatility — All Week

The fixed income market may have looked at the equity selling of last week and said, “what took you so long?” After a month of steady selling in Treasuries—that took the 10-year yield from 2.80% to 3.26%— equities finally took notice and sold off the most since the 10% decline in February. Perhaps it was the 30-year mortgage rate breeching 5% for the first time in seven years that finally shook equity investors out of their slumber but whatever the exact catalyst, people—including the president— were blaming higher rates for much of the sell-off. The equity correction in February stabilized and rallied after correcting 10%. If we’re to repeat that performance it indicates a Dow of 24256, approximately another 1000 Dow points away.  Also a potential trigger for more volatility could be whether the U.S. calls out China as a currency manipulator. Treasury staff have returned a finding that that characterization is misplaced but Treasury Secretary Mnuchin will either side with his staff or his boss, the president, in declaring the official U.S. position.


2.  FOMC Meeting Minutes — Wednesday

The mid-week release of the minutes from the FOMC’s September rate-hiking meeting will be combed through for indications of confidence by the members in getting a December rate hike on the books. The recent market volatility has taken place after the meeting so any discussion of accommodative financial conditions will have to be interpreted in light of the tightening that has come as a consequence of the equity selling and volatility. Given comments from several members subsequent to the meeting, confidence in the economy and inflation appear resolute enough to withstand the moderate equity selling that has occurred. That implies to us the December rate hike is still more likely than not but expecting three hikes in 2019 becomes a harder sell if the equity selling continues into correction territory. The Goldman-Sachs Financial Conditions Index has tightened to a level last seen in May 2017 and that preceded a six-month Fed pause after they had reached 1.00%. If conditions continue to tighten are we due for another pause after a December hike?


3.  September Retail Sales — Monday

The September Retail Sales Report is out this morning and results mostly missed expectations and under August’s lackluster readings except for the all-important Control Group reading (which is a direct GDP input). It posted a solid 0.5% gain versus the unchanged August reading. Overall sales were up just 0.1% versus 0.6% expected and 0.1% in August while sales ex-autos & gas were unchanged versus expectations of 0.3% and 0.1% in August. The misses in most metrics are mostly offset by the decent Control Group gain  which should provide enough support for third quarter GDP estimates to remain in the 3.2% to 4.0% range with consumer consumption expected at 3.2% which would be impressive follow-through after soaring 4.2% gain in the second quarter.


4.  September Existing Home Sales — Friday

The housing market has had mixed releases lately so the pair of existing sales and housing starts figures will be watched closely this week. Existing home sales account for nearly 90% of the market and gives us the broadest view of market health but with data based on closings it can be a bit dated. For September existing home sales are projected to total 5.29 million annualized units which is slightly down from the 5.34 million in August. The average over the past year has been 5.47 million annualized so in keeping with recent housing releases a below-average print with a modest month-over-month decrease of –0.9%.


5.  September Housing Starts — Wednesday

Housing starts for September are expected to decrease -5.6% month-over-month with an annualized starts number of 1.210 million versus 1.282 million in August. The average over the past year has been 1.260 million so a slightly below-trend starts number is expected along with a sequential decrease versus August. Permits, which aren’t subject to the vagaries of weather which can impact the starts number, are expected to increase slightly to 1.275 million annualized versus 1.249 million the prior month. The average over the past year has been 1.260 million, so a slightly above average print is expected and with a slight sequential increase versus the prior month. In summary, the housing numbers are expected to show a continued grind around recent levels with little to indicate activity is about to move higher, or lower.

Existing Home Sales and Housing Starts




Technicals Investment Yield Ranges Over Last Year


US Treasuries

FHLB Agency Bullets

Mortgage Backed SecuritiesMunicipals

US Corporate - Financials

US Agency Swap Rates

 Source: Bloomberg





Tom Fitzgerald Signature

Thomas R. Fitzgerald

Director, Strategy & Research



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