After initially starting yesterday with 10-year Treasury yields approaching 3.00%, the market turned around as the entire curve rallied ending the day in the green as investors grappled with a myriad of issues confronting the global economy. With the kick-off today of the G-7 meeting in Quebec, Canada looking about as contentious as any in recent memory, the post-war trade coalition is a little stressed and that is working to keep Treasuries well bid. Add to the G-7 tensions the ongoing trade conflicts with China and NAFTA countries Mexico and Canada not to mention next week’s summit with North Korea, and investors have plenty to be reserved about. This morning, the light data calendar continues with little of consequence so the trade will be dictated by the political headlines coming out of the G-7 and the lead-up to the meeting has everyone fearing it like a Thanksgiving dinner with warring family factions ready to get at it. Economically speaking the next events of importance are Tuesday’s May CPI numbers, FOMC rate decision on Wednesday, ECB meeting on Thursday, and Treasury supply sprinkled throughout the week. Those upcoming events should keep any Treasury rallies from political fallout in check. Currently, the 10-year note is unchanged in price to yield 2.93%.
|Economic News||GDP Growth: Golden Age vs. Now||Market Rates|
The dearth of economic releases this week has left the investment playing field wide open for political influence and it’s not failing to deliver. While we are, hopefully, enjoying our weekend, the heads of state from the G-7 countries will gather in Quebec, Canada and it’s looking like it will be a contentious affair. The Trump administrations trade/tariff positions has it looking more like a G-6+1 and that one is the U.S.
The word from the White House is that the president is spoiling for a fight. Reports have it that Trump plans to confront other world leaders this weekend over what he believes is a global economic system tilted against the United States. That risks escalating tensions with U.S. allies who have expressed varying degrees of outrage at his pivot toward protectionism and isolationism. In a sign Trump is looking to stoke divisions and not ameliorate them, White House officials are discussing ways to impose additional economic penalties against Canada — the host nation for the summit — in retaliation for Ottawa’s threat to levy tariffs next month on roughly $13 billion in U.S.-made products. Treasury Secretary Mnuchin has been urging both sides de-escalate but he appears to be a lonely voice in the administration right now.
Meanwhile, The EU announced on Wednesday it will start imposing duties in July on a list of U.S. products in response to Trump’s decision to apply tariffs on steel and aluminum imports from Europe. The EU says it will introduce 'rebalancing' tariffs on about 2.8 billion euros’ ($3.4 billion) worth of U.S. steel, agricultural and other products, including bourbon, peanut butter, cranberries and orange juice.
German Chancellor Merkel—the de-facto leader of Europe—predicted difficult talks, warning that there is 'no sense in papering over divisions' on issues such as trade. ‘It is apparent that we have a serious problem with multilateral agreements here, and so there will be contentious discussions'. Merkel made these comments as she addressed her first question time in the German parliament which is new future of the German government.
The G-7 contentiousness is souring the mood too at NATO meetings and NAFTA talks and with the planned North Korea summit next week, the geopolitical machinations will start, at some point, to more forcefully enter the Fed’s calculus as to monetary policy. For next week’s FOMC meeting, a 25bps rate hike is a fait accompli and it’s expected the statement, press conference, and updated forecasts will continue to project an air of confidence in the economic outlook for the U.S. As long as domestic economic results continue to show growth, the Fed is unlikely to walk back from their schedule of 25bps hikes every three months. It’s the December meeting, which would be the fourth hike this year, that stands out as a possible point to pause.
The ECB has a meeting next Thursday and it’s likely, given recent official comments, they will begin discussing the winding down of their QE purchases later this year despite the developing complications from the new nationalist government in Italy and some weakening in peripheral EU countries. It was thought the Italian turmoil would delay any material change in policy but it looks like the ECB is intent on setting the stage for winding down QE despite the recent turmoil and soft first quarter economic results. If such an announcement is made at the Thursday ECB meeting that will also add to the Fed’s future policy calculations.
What it would mean to the Fed is that another central bank could be in tightening mode later this year, and with at least eight hikes in the books after September, the risk of policy error increases, especially if the trade dust-ups continue, or are further enflamed. That’s why we’re still not convinced we see a fourth hike this year. What we do see is further curve flattening via short-end yield increases due to confident Fed rhetoric, offset by long-end range bound trading that is constrained by the above issues.
GDP Growth: Golden Age vs. Now
President Trump is right to boast about America’s economic performance, but describing it as the “greatest economy we’ve ever had” in a recent Tweet is a stretch. Major progress has been made since the Great Recession ended in 2009, and that improvement has continued during Trump’s 16 months in office. The decades after World War II, however, were the best in U.S. history as pent-up consumer demand and booms in housing and manufacturing melded into a Golden Age of growth that averaged 4.4%. The ‘80’s averaged 3.1% while the 90’s did 3.2%. Meanwhile, Trump-term growth has averaged 2.4%, which is good but not the ‘greatest ever’ but it beats the 00’s 1.8% average.