As the 10yr Lurks Just Under 2%, Chair Powell to Testify on Capitol Hill

Nov 12, 2019
US Capitol Building at Dusk

Trade Talks and Powell Testimony Headline Week

The positive vibes of a possible US/China trade deal were dimmed a bit on Friday when President Trump declared no decision had been made to reduce tariffs. That took some of the gleam off the risk-on shine and staunched the Treasury selling. How the trade picture progresses this week will obviously impact pricing but we think the bulk of the good news from a possible Phase 1 deal has been priced in.  Fed Chair Powell will testify on Capitol Hill tomorrow and Thursday with the focus on any fresh guidance for the path of monetary policy. While the odds of a rate cut next month are practically nil, the focus will be on trying to gauge the length of the pause.  The first FOMC meeting in 2020 is January 30 so the Fed will have information regarding the holiday selling season and further developments, or lack thereof, on trade. Those two data points will probably dictate whether a rate cut is on the table for January. Meanwhile, October retail sales and CPI round out the first-tier releases this week with both expected to buttress the Fed’s patient pause stance.


Treasuries
Treasury Curve Today Week Change
3 Month 1.55% +0.04%
6 Month 1.56% +0.03%
1 Year 1.57% +0.04%
2 Year 1.66% +0.07%
3 Year 1.69% +0.11%
5 Year 1.73% +0.14%
10 Year 1.93% +0.17%
30 Year 2.40% +0.15%
Short-Term Rates
Fed Funds 1.75%
Prime Rate 4.75%
3 Mo LIBOR 1.90%
6 Mo LIBOR 1.92%
12 Mo LIBOR 2.00%
Swap Rates
3 Year 1.689%
5 Year 1.707%
10 Year 1.833%
Economic Calendar
Date Statistic For Briefing Forecast Market Expects Prior
Nov 12 NFIB Small Biz Optimism Oct 102.0 102.4 Actual 101.8
Nov 13 CPI (YoY) Oct 1.7% 1.7% 1.7%
Nov 13 Core CPI (YoY) Oct 2.4% 2.4% 2.4%
Nov 13 Real Avg. Weekly Earnings (YoY) Oct 1.0% 1.0% 1.0%
Nov 15 Empire Manufacturing Nov 6.0 6.0 4.0
Nov 15 Import Price Index (YoY) Oct -2.3% -2.3% -1.6%
Nov 15 Advance Retail Sales (MoM) Oct

0.1%

0.2% -0.3%
Nov 15 Retail Sales Control Group (MoM) Oct 0.3% 0.3% 0.0%
Nov 15 Industrial Production (MoM) Oct -0.4% -0.4% -0.4%

calendar icon Top 5 Events for the Week

Nov 12 - 15, 2019

1. Trade & Impeachment Developments – All Week
2. Chair Powell Congressional Testimony – Wed./Thurs.
3. October Retail Sales – Friday
4. October CPI – Wednesday
5. October Industrial Production – Friday

 

1.  Trade & Impeachment Developments – All Week

The positive vibes of a possible US/China trade deal were dimmed some on Friday when President Trump declared no decision had been made to reduce tariffs. That took some of the gleam off the risk-on shine and steadied the recent Treasury selling. How the trade picture progresses this week will obviously impact yields but we think the bulk of the good news from a possible Phase 1 deal has been priced in. In addition, the rumored contours of a deal seem rather limited and as such will have only modest economic benefit. Meanwhile, the impeachment proceedings now move to the public phase and that will force the issue front and center for both the public and investors. The proceedings are likely to proceed over several weeks so real market impact is further down the road but the ride starts this week.

 

2.  Chair Powell Congressional Testimony – Wednesday/Thursday

Fed Chairman Jerome Powell will testify on Capitol Hill tomorrow and Thursday with investors attuned to any fresh guidance on the path of monetary policy. While the odds of a rate cut next month have slipped to almost nil, the focus of the market will be more on trying to gauge the length of the pause. While we’re sure to hear the phrase “data-dependent” tossed out as the chief reaction function, the market will be reading the tea leaves of his comments. The first FOMC meeting in 2020 is January 30 so the Fed will have plenty of information regarding the holiday selling season and, of course, further developments, or lack thereof, in the trade arena. Those two data points will probably dictate whether a rate cut is on the table for January.

 

3.  October Retail Sales – Friday

The consumer was unfazed during the summer with all the trade and geopolitical handwringing and even with job growth slowing. However, spending did soften in September with a noticeable dip in car buying.  Investors will want to see if the September experience was a one-off blip or the start of a softening trend. Expectations are for a slight bounce with a 0.2% gain versus a decline of –0.3% in September. Sales ex-autos & gas are expected to be up 0.3% versus 0.0% the prior month.  The Retail Sales Control Group (a direct GDP input) is also expected to increase 0.3% versus an unchanged reading in September.  Thus, expectations are for a decent report, that resumes recent trends after the one-off softness in September.

 

4.  October Inflation Readings – Wednesday

Away from Chair Powell’s testimony and trade headlines, the CPI report for October will capture plenty of market attention.  Expectations are for overall CPI to be up 0.3% versus 0.0% in September. The core rate (ex-food and energy) is expected to increase 0.2% versus September’s 0.1% increase. On a year-over-year basis, CPI is expected to be 1.7%, matching the September print while core CPI YoY is expected to remain unchanged at 2.4%.  Recent Fed speak implies a greater willingness to allow inflation to move above 2% such that inflation readings this month won’t be the game-changer for Fed policy direction. With the Fed’s preferred cost gauge, core PCE, currently at 1.7%, inflation won’t keep the Fed from cutting rates if the economy and/or trade softens in the next few months.

 

October CPI

 

5.  October Industrial Production – Friday

With the manufacturing sector in a clear downtrend, Friday’s October Industrial Production report will be another view on that struggling sector of the economy. For October, industrial production is expected to dip –0.4% matching the September decline. Factoring out utilities, manufacturing production is expected to decline –0.7%  versus –0.5% in September. Capacity utilization is expected to dip slightly to 77.0% versus 77.5% in September, In summary, further weakness in the sector is expected.

 


bar graph icon  Yield/Duration Matrix

 Yield/Duration Relationship 

CenterState Disclosure

 


 

Tom Fitzgerald Signature 

Thomas R. Fitzgerald

Director, Strategy & Research

Tfitzgerald@centerstatebank.com

 

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