Trade Tensions and New Supply Likely to Dictate Trading This Week

Jun 25, 2018
Cars off Ship

Trade War Rhetoric and Euro Politics

In the week ahead trade tensions, new supply, and European politics will dominate the spotlight and likely overshadow all else, but there are other matters of consequence coming this week. Leading the list of those items are economic releases including the May Personal Income and Spending Report with solid 0.4% gains expected for both. Durable Goods Orders for May are due Wednesday with  results expected to be bit weaker than April.  New and pending home sales for May will get revealed today and Wednesday, respectively with a slight uptick in both expected.  Sprinkled throughout the week is the final auctions of Treasuries for the first half of the year with 2yr, 2yr floaters, and 7yr notes which may keep pressure on the front end further flattening the yield curve.


Treasuries

Treasuries

Short-Term Rates

Short-term Rates

Economic Calendar

Economic Calendar

 


Top Events of the Week Top 5 Events for the Week

JUNE 25 – 29,  2018

1.  Latest Trade War News — All week
2.  Personal Income & Spending — Friday
3.  Preliminary May Durable Goods Orders —Wednesday
4.  Treasury Supply — Tue/Wed/Thurs.
5.  May New & Pending Home Sales — Mon/Wed.

 

 

1.  Trade War Machinations — All Week

The tit-for-tat tariff actions continued late last week with the EU slapping 25% tariffs on $3.6 billion in U.S. goods. Now that’s not a significant number in the scheme of the U.S. economy but the goods identified were focused on Senate Majority Leader McConnell’s Kentucky bourbon and House Speaker Ryan’s home state Harley-Davidson motorcycles. A little political message being sent, don’t you think?  President Trump was quick to respond to the EU salvo with the threat to tax all EU autos (think German) with a 20% tariff. What this week holds is anyone’s guess but we’re sure a slow summer week will provide something and it’s likely to support Treasuries. 

 

2.  Personal Income & Spending for May — Friday

With 2/3rds of the economy tied to consumer consumption the monthly personal income and spending numbers are always a key for the economic outlook.  Personal income is expected to rise 0.4% beating the 0.3% print in April.  Personal spending is expected to also rise 0.4%, but missing the April print of 0.6%. The yearly MoM averages have been 0.3% for income and 0.4% for spending so nearly on-average prints for both are expected.  Real spending—adjusted for inflation— is expected to increase 0.2% versus 0.4% in April.   The results indicate that while first quarter consumption was the lowest in nearly five years, the rebound in the second quarter is occurring as expected. If the April and expected May spending gains can be sustained into June it bodes well for meeting the 3.0% second quarter consumption estimate which will compare favorably to the 1.0% first quarter figure and be a key in meeting the 3.4% expected GDP for the quarter.  The important Core PCE (YoY) is expected to tick up to 1.9% from 1.8% in April.

 

3.  Preliminary May Durable Goods Orders — Wednesday

The headline durable goods orders number for May is expected to show a second straight month of declining orders which, if it persists, will raise flags that the trend may be an early warning sign of trade war rhetoric having real world consequences.  The headline orders number is expected to decrease –0.9% versus –1.6% in April.  Orders ex transportation are forecast to increase 0.4% versus 0.9% the prior month. Shipments of capital goods less air and defense (a measure of business investment) are expected to be up 0.3% versus a 0.9% increase the prior month.  If these expectations are met it will add a dose of concern that trade war rhetoric is starting to impact business confidence and future orders.

 

4.  Treasury Supply — Tuesday/Wednesday/Thursday

The Treasury completes its first half-year funding this week with a trio of short-end auctions: 2yr ($34b), 2yr FRN($16b), and 7yr ($30b) notes will be auctioned Tuesday, Wednesday and Thursday, respectively. The trio of auctions should keep pressure on short-end yields while the supply is put away. That supply combined with the overhang of trade war tit-for-tat tariffs aiding the long-end could provide the impetus to further flatten the curve to new cycle lows. The 2yr-10yr spread hit a low of 34bps last Tuesday, and that level is being challenged again this morning.

 

5.  May New and Pending Home Sales —Monday/Wednesday

This week brings a host of housing-related reports with the S&P CoreLogic CS 20-City Home Price Index for April, and Pending and New Home Sales for May. The S&P report is expected to show a year-over-year price increase of 6.80% vs. 6.79% in March. Meanwhile, new home sales are expected to increase 0.7% to 667 thousand units annualized versus 662 thousand the prior month. The average over the past year has been 630 thousand so a beat against the yearly average and a slight increase versus the April result is expected. Pending home sales for May (based on contract signings) are expected to be up 0.7% MoM vs. –1.3% in April while YoY is expected up 0.4% matching the April result. If expectations come to pass it looks like sales are advancing slowly despite limited inventory and higher interest rates.

 

New & Existing Home Sales

 

 

 


Technicals Investment Yield Ranges Over Last Year

 

US Treasuries

FHLB Agency Bullets

Mortgage Backed Securities 

Municipals

US Corporate - Financials

US Agency Swap Rates

 Source: Bloomberg

 

 

 


 

Tom Fitzgerald Signature

Thomas R. Fitzgerald

Director, Strategy & Research

Tfitzgerald@centerstatebank.com

 

 

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