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September 20, 2019

Chinese Delegation Cancels US Farm Trip, Sending Risk Assets Lower

 

Stocks pull back after Chinese officials cancel trip to US farms, re-igniting trade fears. Stocks had climbed higher to start the day but quickly fell after news broke that China’s trade delegation was headed back to China early. The delegation was supposed to visit farms in the US heartland next week, presumably as a gesture of good faith after agreeing to purchase additional US agricultural products. The abrupt cancellation came shortly after President Trump said he wasn’t interested in a “partial deal” with China, the President also conceding that despite his...

September 18, 2019

Fed Cuts Rates as Expected, But Division Among Members Grows

 

Fed cuts rates by 25 basis points as expected, but FOMC remains divided on future outlook for rates. In a somewhat anticlimactic move, the Fed decided to cut their policy rate by 25 basis points to 1.75%-2.00%, citing growing headwinds and low inflation. The rate decision was not unanimous as Boston Fed President Eric Rosengren and Kansas Fed President Esther George both voted to keep rates unchanged, and St Louis Fed President James Bullard voted for a 50 basis point cut. The updated “Dot Plot” which shows FOMC member’s expectations for future rates illustrates...

September 17, 2019

Repo Rates Surge on Eve of FOMC Decision, Treasurys Rally

 

Fed Funds futures pricing in 100% likelihood of rate cut on eve of Fed decision. Markets have long expected the Fed to cut rates tomorrow, having priced in an over 50% likelihood of a rate cut to the 1.75%-2.00% range since the start of June. The only uncertainty that remains is how the FOMC’s statement will change, and what Fed Chair Jerome Powell will say in his subsequent press conference. Powell has proven much less adept than his predecessors at communicating clearly during such press conferences, his sometimes conflicting statements leading to large price...

September 16, 2019

Crude Jumps Nearly 11% Amid Drone Attacks, Treasurys Benefit From Flight to Quality

 

Brent crude rises by most since 1990 Kuwait invasion after drone attack on Saudi Arabia. The attack will halve Saudi oil output for months to come, greatly constraining supply and leading Brent crude higher to $66/barrel- nearly 11% higher on the day. The output drop is the single greatest drop in supply from a single incident ever, and equates to nearly 5% of global supply. While the short-term disruption to oil production will certainly be a headwind for the global economy, the greater risk is an increase in geopolitical instability in the Middle East region....

September 12, 2019

Stocks and Rates Rise as Trade Talk Prospects Improve

 

Treasury rally continues to peter out despite new stimulus from European Central Bank. Yields and swap rates initially fell after the ECB announcement of a deposit rate cut, additional stimulus and a commitment to do “whatever it takes” to prevent deflation. That said, Treasurys quickly gave back gains after a stronger than expected core-CPI figure (2.4% vs 2.3%) and news of a possible interim trade deal between the US and China. The 10 year Treasury yield ultimately climbed 4 basis points on the day, closing at 1.774%.

 

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September 10, 2019

Treasury Sell-Off Continues, Equities Eke Out Gain

 

Treasurys sell-off yet again, yields and swap rates rising 8+ basis points across the curve. Rates were higher across the curve, the 10 year Treasury yield rising to 1.73% on the day. Despite the recent sell-off, Fed Funds futures continue to imply a 100% likelihood of a rate cut in September and still price in an additional rate cuts before the end of the year. The MOVE Index, a measure of interest rate volatility, has fallen 14 points to 76 after hitting a 3 year high earlier this summer.

 

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September 9, 2019

Rates Jump Higher as Trade Sentiment Continues to Improve

 

Treasury yields and swap rates spike as sentiment around trade continues to improve. Swap rates and Treasury yields rose 7+ basis points across the curve today as Treasury Secretary Steven Mnuchin said that the US and China have made “lots of progress on trade talks.” The 10 year Treasury yield would close at 1.64%, the spread between 2 year and 10 year yields remaining positive at +5 basis points. The sell-off in government bonds was not limited to the US as 10 year German Bund yields rose back to -0.60% ahead of the European Central Bank’s policy meeting this...

September 6, 2019

Rates Little Changed as Powell Expresses Optimism, Jobs Report Disappoints

 

Nonfarm payrolls disappoint, supporting Fed case for rate cut at September FOMC meeting. The slowdown in private sector job growth (130k increase vs estimates for 160k) will help FOMC doves who want an interest rate cut at FOMC meeting on September 17th. Average hourly earnings did come in slightly better than expected with a 0.4% increase MoM, bringing wage growth to a 3.2% annualized rate. Fed Funds futures continue to price in 92.6% likelihood of a 25 basis point rate cut and a 7.4% likelihood of a 50 basis point rate cut at the September FOMC meeting.

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September 4, 2019

Geopolitical Risks in UK and Hong Kong Ease, Helping Risk Assets Rally

 

Global political risks abate slightly, helping global equities rebound. After months of protests, Hong Kong leader Carrie Lam withdrew the extremely controversial extradition bill that would have meant the end of the “one country, two systems” principal under which Hong Kong had been governed since 1997. The easing in tensions led to a strong rally in the Hang Seng Index (+3.90%). The UK in turn saw a reduction in the odds of a no-deal Brexit as the House of Commons put forth legislation to prevent a departure from the EU without a deal and then prevented PM Boris...

September 3, 2019

Manufacturing Activity Contracts, Sending Equities and Rates Lower

 

US stocks tumble as ISM manufacturing index unexpectedly contracts. The S&P 500 and Dow Jones Industrial Average both fell after the ISM manufacturing report showed a contraction in domestic manufacturing for the first time in three years. That report exacerbated a risk-off move that was already in motion as Brexit and continued trade war uncertainty weighed on investor sentiment. European stocks also closed lower, the FTSE 100 dropping 0.5% while Germany’s DAX index closed down 0.5%.

 

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