The Shifting Outlook on a Trade Deal Looms Over Treasuries

Nov 22, 2019
Hong Kong on Fire as Protests Continue

The tension created from the increasing involvement of the US government in the Hong Kong protests continues to generate uncertainty over the US/China trade talks, and that has stymied the risk-on tone in stocks after they hit all-time highs on Monday. With tariffs set to go into effect on the final piece of Chinese imports on December 15th anxiety is building.  Part  of the concern is that the final tranche of Chinese goods not currently subject to tariffs are mostly consumer-oriented and the increased cost could add another ill-timed headwind to the holiday-selling season. Some rumors have surfaced that a delay of the additional tariffs could be in the offing if a deal is close.  The president is reporting this morning that a “deal is potentially very close” but markets remain suspect. In addition. the Hong Kong Democracy Bill sits on Trump’s desk awaiting his signature, and even unsigned it has caused great consternation with the Chinese. If the president signs the bill into law that could doom any thoughts of a trade truce—which the phase 1 deal has quickly morphed into—before year-end. Thus, equity markets are a bit nervous while the 10yr Treasury yield at 1.76%,  is comfortably nestled in the 1.70% to 1.97% trading range. A quick resolution to the trade  dispute would push yields to the upper end of the range while continued fallout from the Hong Kong matter could push yields the other way.  That’s really the singular issue that is driving market direction for now.

 

 

Once the near-term fate of the trade truce is determined yields are likely to be driven by the outlook for the holiday-selling season. The lateness of Black Friday this year shortens the key retail period but with equities churning near all-time highs the consumer may feel financially emboldened for the three week sprint to Christmas after Thanksgiving. In the third quarter, consumer spending retrenched a bit so if there’s a rebound coming we’ll most likely see it during Black Friday weekend; thus, we should get a pretty quick tell on holiday selling after next weekend with yields reacting accordingly.

 

Away from the shifting winds surrounding the trade talks, results from retailers continue to garner some market attention. While a shift from brick and mortar stores to online retailers has been an ongoing theme for several years now, it’s either accelerating this season or the consumer is perhaps pausing a bit. While some retailers have posted decent results a broad retail index is having a bad week.  For example:

  • While Target and Lowe’s reported solid results on Tuesday, Macy’s, along with Home Depot and Kohl’s reported disappointing third quarter sales and earnings along with dour forecasts. The S&P Retail Index is down 3.5% on the week as many of the large retailers grapple with disappointing results.
  • Away from retail, the Conference Board’s Leading Economic Index fell –0.1% in October. While that matched expectations, the prior month was revised lower from –0.1% to –0.2%.  The index has been a solid recession signaler when it dips well below zero on a year-over-year basis. After October’s result, the YoY reading is 0.3% but the trend is decidedly lower as October represents the eighth straight month of either stable to declining YoY readings.
  • Meanwhile, in the manufacturing sector weakness looks to continue in the near-term but the outlook six months ahead is brightening. While the November Philadelphia Fed Manufacturing Survey’s headline beat expectations the details were weaker than the headline suggests which is a separate survey question.  A slowdown in the activity indices suggest that a sub-50 ISM reading is likely to persist beyond the current three-month stretch, challenging the five-month span in 2015-2016 as the longest for this expansion. However, an increase in the six-month ahead outlook took some of the negative away from the current activity indices and points to perhaps better times down the road.
  • Finally, sales of previously owned homes increased in October to 5.46 million units annually but that missed the Bloomberg consensus of 5.49 million. The sales activity, however, improved 1.9% from September  and marks the third advance in the last four months as falling mortgage rates keep buyers active in the residential real estate market. The median sales price rose 6.2% from a year earlier to $270,900.  Continued job gains and low interest rates are tailwinds to the market while tight inventory is constraining sales. The inventory of homes available for buyers fell 4.3% from a year ago to 1.77 million units, the lowest October reading on record. After a softening in activity in 2018, this year has marked a rebound but levels still remain off the highs from 2017 (more on that below). Nevertheless, the rebound versus 2018 will provide a slight net positive to GDP in the fourth quarter.

 


line graph icon  Existing Home Sales - 2019 Momentum Continues

Existing home sales comprise about 90% of the sales activity in residential real estate.  In 2018, sales activity dipped as higher mortgage rates conspired with limited inventory to drive prices higher than wage gains and that stymied sales activity. After the Fed shifted earlier this year from hiking rates to easing, activity rebounded as the drop in mortgage rates, higher wages, and a slowing in home price appreciation created a more conducive backdrop for sales. Nevertheless, despite the rebound in sales activity this year it has yet to rebound to levels seen in 2017 (>5.5m annualized). Limited inventory remains the primary roadblock to headier sales, perhaps that changes in 2020?

Existing Home Sales

 

 


bar graph iconMarket Rates

Treasury Curve Today Chg Last Wk. LIBOR Rates Today Chg Last Wk. FF/Prime Rate Swap Rates Rate
3 Month 1.56%  +0.04% 1 Mo LIBOR 1.72%  -0.06% FF Target Rate 1.50%-1.75% 3 Year 1.539%
6 Month 1.57%  +0.02% 3 Mo LIBOR 1.90%  -0.01% Prime Rate 4.75% 5 Year 1.536%
2 Year 1.60%  +0.04% 6 Mo LIBOR 1.89%  -0.04% IOER 1.55% 10 Year 1.649%
10 Year 1.76%  +0.05% 12 MO LIBOR 1.91%  -0.07% SOFR 1.58%    

 

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