Trade War Saber-Rattling Boosts Treasuries

Jun 18, 2018

Will Trade War Saber-Rattling Continue?

After last week’s full slate of  market moving events, the pace slows this week which leaves the spotlight to the fallout from central bank actions and trade-related news. We were impressed last week with the resilience of Treasuries  to withstand a clearly ebullient Fed Chair Powell, an accelerating pace of rate hikes, and upgraded economic forecasts following the FOMC meeting. That may be because away from the U.S., economic news in other places hasn’t been all that great. The ECB doesn’t expect to hike until summer 2019, at the earliest, while China held back tightening after weaker industrial production and retail sales, and Japan kept its accommodative policies in place.  The saber-rattling  over tariffs is only likely to slow global trade which will aid the bid in Treasuries as well.



Short-Term Rates

Short-term Rates

Economic Calendar

Economic Calendar


Top Events of the Week Top 5 Events for the Week

JUNE 18 – JUNE 22,  2018

1.  Trade War Escalation? — All week 
2.  Fallout from Central Bank Actions—All Week
3.  May Existing Home Sales —Wednesday
4.  May Housing Starts & Permits— Tuesday
5.  Leading Index — Thursday



1.  Trade War Escalation?—All Week

After the Trump Administration announced 25% tariffs on $50 billion in Chinese imports on Friday, the Chinese quickly reacted with an announcement of 25% tariffs on $34 billion on U.S. imports with the tariffs planned to start on July 6. The tit-for-tat actions mean that unless some manner of diplomacy breaks out we’re in a trade war that looks only to escalate. The developments in this area seem only to throw sand in the gears of international trade, slowing growth domestically and globally. The actions and heated rhetoric are likely to keep a bid in Treasuries as risk-off trades prevail. 


2.  Fallout From Central Bank Actions—All Week

The worlds top central banks were in action last week but only the Fed hiked rates and displayed a rather hawkish tack on monetary policy. The ECB, Bank of Japan and Bank of China also met but either delayed rate hikes (in the case of China), or spelled out clear intentions to not hike anytime soon (ECB and BOJ).  After the Fed’s tightening, solid retail sales numbers for May indicate the Fed is likely to continue its planned hikes in September and December.  So, the dichotomy between the U.S. and rest-of-world was clearly on display. That should contribute to continued dollar strength that could slow export sales and increase the disinflationary impulse from imports. It will also encourage foreign investments in Treasuries. All this seems to point to a positive backdrop for Treasuries.


3.  May Existing Home Sales—Wednesday

The housing market has had some mixed releases lately with some slowing sales that have been attributed to a lack of supply as well as rising mortgage rates. Existing home sales account for nearly 90% of the market and give us the broadest view of market health but with data based on closings it can be a bit dated versus new and pending home sales which are based on contract signings. For May, existing home sales are projected to increase 1.1% to 5.52 million annualized versus 5.46 million in April. The average over the past year has been 5.51 million annualized so a mostly on-average print is expected but a decent sequential increase.

Existing Home Sales


4.  May Housing Starts & Permits—Tuesday

Housing starts for May are expected to increase 1.9% month-over-month with an annualized starts number of 1.312 million versus 1.287 million in April. The average over the past year has been 1.241 million so an above-trend starts number is expected both on the annual average and sequentially. Permits, which aren’t subject to the vagaries of weather which can impact the starts number, are expected to decrease slightly to 1.350 million annualized versus 1.364 million the prior month. The average over the past year has been 1.312 million, so an above-average print is expected despite a dip versus the prior month. In summary, the housing numbers this week are expected to show, for the most part, increases over April activity and annual averages. 


5.  May Leading Index —Thursday

The Leading Index is a compilation of several economic variables that tend to move before changes in the overall economy.  Expectations are for the third straight month-over-month increase of 0.4%. The peak reading over the last year was 1.3% in October while 0.8% was the next highest reading reached in January. 




Technicals Investment Yield Ranges Over Last Year


US Treasuries

FHLB Agency Bullets

Mortgage Backed Securities 


US Corporate - Financials

US Agency Swap Rates

 Source: Bloomberg





Tom Fitzgerald Signature

Thomas R. Fitzgerald

Director, Strategy & Research



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