China Retaliates Over Latest Tariffs, Treasury Yields Fall Further in Response

Aug 05, 2019
Soybeans in the Field

Trade Fallout Likely to Dictate Market Action This Week

With a slow economic calendar this week the playing field is open for more fallout from last week’s tariff news while a smattering of Fed speak could provide an updated Fed view in light of the rekindled trade war. We awake to news that China is ordering state-owned companies to suspend buying U.S. agricultural products and has allowed its currency to weaken to a level last seen eleven years ago. The retaliation has Treasuries hitting new low yields across the curve.  The tariff news also moved odds of two more rate cuts this year right back where they were before the meeting/press conference. With Fed member Bullard speaking tomorrow and Evans on Wednesday they may provide an updated view of Fed policy after the tariff news. The July ISM Non-Manufacturing Index today and PPI on Thursday are the major economic-related releases but they will take a backseat to the trade-related dust-ups.


Treasuries
Treasury Curve Today Week Change
3 Month 2.02% -0.10%
6 Month 1.94% -0.15%
1 Year 1.77% -0.20%
2 Year 1.62% -0.22%
3 Year 1.58% -0.23%
5 Year 1.58% -0.26%
10 Year 1.77% -0.29%
30 Year 2.32% -0.26%
Short-Term Rates
Fed Funds 2.25%
Prime Rate 5.25%
3 Mo LIBOR 2.24%
6 Mo LIBOR 2.13%
12 Mo LIBOR 2.12%
Swap Rates
3 Year 1.557%
5 Year 1.535%
10 Year 1.683%
Economic Calendar
Date Statistic For Briefing Forecast Market Expects Prior
Aug 5 ISM Non-Manufacturing Index July 55.5 55.5 55.1
Aug 6 JOLTS Job Openings June 7.400m 7.400m 7.323m
Aug 7 Consumer Credit Growth June $17.000b $16.000b $17.086b
Aug 8 Bloomberg Consumer Comfort July NA NA 64.7
Aug 8 Wholesale Inventories MoM Jun F 0.2% 0.2% 0.2%
Aug 8 PPI Final Demand MoM July 0.2% 0.2% 0.1%
Aug 8 PPI Final Demand YoY July 1.7% 1.7% 1.7%
Aug 8 PPI Ex Food & Energy MoM July 0.2% 0.2% 0.3%
Aug 8 PPI Ex Food & Energy YoY July 2.4% 2.3% 2.3%

calendar icon Top 5 Events for the Week

Aug. 5 - 8, 2019

1.  Trade-Related Fallout – All Week
2.  Fed Speak – Tues./Wed        
3.  July ISM Non-Manufacturing Index – Monday    
4.  June JOLTS Job Openings – Tuesday
5.  July PPI – Thursday   

 

1.  Trade-Related Fallout – All Week

This week is devoid of major market-moving events, unlike last week, so that leaves investors open for more fallout from last week’s tariff news and we awake to news that China is ordering state-owned companies to suspend buying U.S. agricultural products and has allowed its currency to weaken to a level last seen eleven years ago. The retaliation has Treasuries hitting new low yields across the curve.  The tariff news that the U.S. was putting 10% tariffs on another $300 billion in Chinese imports quickly put the scare of increased global uncertainty back on the front burner. That pushed odds of two more rate cuts this year right back where they were before the FOMC meeting/press conference. While the promised Chinese retaliation has occurred this morning we’ll be waiting for a response from the White House. Thus, trade tensions are ratcheting up and that and the dashed hopes for an imminent  trade deal will continue to put a bid in Treasuries as they move to yield levels not seen since the presidential election.

 

2.  Fed Speak – Tuesday/Wednesday

With the rate cut last week and the subsequent news that 10% tariffs on $300 billion in additional Chinese goods would become effective September 1, investors are curious what the Fed’s reaction will be to the latest ratcheting up of trade tensions. Recall one of the reasons for the rate cut was the increase in global uncertainty so news of new tariffs and China’s retaliatory response can only add to those uncertainties. Enter Fed members James Bullard and Charles Evans as they speak this week. Bullard speaks tomorrow on the economy and as he’s never at  a loss for words it’ll be interesting to get his take on the latest trade developments and how they may impact Fed policy. Charlie Evans has a media event on Wednesday providing a  second view. Both are regarded as some of the most dovish members so keep that in mind when interpreting their comments.

 

3.  July ISM Non-Manufacturing Index – Monday

The ISM Non-Manufacturing Survey today follows the ISM Manufacturing survey from last week that flirted precariously close to the dividing line between a contracting and expanding sector. The services sector, however, constitutes nearly 90% of the economy and it’s not expected to be close to contraction territory. That survey is expected to show continued strength with a 55.5 print forecast versus 55.1 in June. The survey has averaged 57.9 over the past year so a slight decrease to the yearly average is expected but still well above the 50 dividing line indicating more health in the services sector versus manufacturing.

 

4.  June JOLTS Job Openings – Tuesday

Along with last week’s jobs report tomorrow’s JOLTs Job Openings report will provide a little more information on the labor market. While the report is a bit dated, as it’s June data, it does have some additional indicators that are followed by the Fed. One of the primary indicators we look at is the Quits Rate which measures the number of voluntary job quitters as a percent of total employed. It provides a measure on worker confidence as those quitting jobs voluntarily probably feel comfortable in finding other employment. The Quits Rate has been running at 2.3% for the past five months which is a high reading for this cycle. Let’s see if it continues for another month. 

 

Quits Rate

 

5. July PPI Report – Thursday

The July PPI Report is due tomorrow and while not as consequential a read on inflation as the CPI and PCE readings it does provide a look at wholesale-level inflation which is especially important in gauging price pressures for manufacturers and distributors, especially with tariff costs and all that. Expectations are that month-over-month figures are expected to be up 0.2% overall and core while the year-over-year total is expected to be 1.7% overall and 2.3% core. Those levels are identical to June so fairly quiet reads expected on the PPI front.

 

 


bar graph icon  Investment Yield Ranges Over Last Year

 

US TreasuriesFHLB Agency BulletsMortgage Backed SecuritiesMunicipalsUS Corporate - FinancialsUS Agency Swap Rates 

Source: Bloomberg

 


 

Tom Fitzgerald Signature 

Thomas R. Fitzgerald

Director, Strategy & Research

Tfitzgerald@centerstatebank.com

 

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