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May 15, 2018

Treasury Selloff Weighs on Stocks, Boosts Dollar

 

Consumer Spending Growth Continues

Sales at US retailers increased for a second consecutive month during April.  Overall retail sales rose a seasonally adjusted 0.3% last month, in-line with median forecasts, while March’s reading was upwardly revised to a robust +0.8%.  Compared to last April, retail sales climbed 4.7% y-o-y.  Growth was recorded in most major retail sectors, with gas stations (+0.8%) seeing the largest bump -- likely a result of the recent uptick in gasoline prices. Core retail sales, which excludes autos, gasoline and construction materials, rose 0.4% on the month, also matching expectations and reflected a slight deceleration from March’s upwardly revised +0.5% level.

 

 

Yields at Multi-Year Highs

US Treasurys sold off steadily throughout today’s trading session with the positive retail data adding to the expectation for rising inflation and increased consumer spending in the economy.  Yields/swap rates surged 2-8bps across the curve in a bear-steepening pattern, as the 10-year note yield touched its highest level since 2011 (3.091%) and the 2-year note yield spiked to its highest in the past decade (2.589%).  Moving in concert with the spike in government yields, the US dollar increase 0.65% in value against major currencies to its highest of 2018.  This dollar move was also likely partially driven by European data released today that exhibited lower than expected GDP growth in the eurozone during Q1 2018.

 

 

US stocks were spooked by the significant move higher in rates and the stronger dollar, as major equity indices lost 0.7%-0.8%.  The DJIA broke its 8-session winning streak, partially weighed down by shares of Home Depot which declined 1.6% after the company reported weaker-than-expected quarterly sales.  In commodities, WTI crude oil futures touched their highest levels since November 2014 before paring much of the gains to finish near $71/barrel, as the rise in the dollar weighed on prices.   

 

 

Fed’s Williams On Rates

John Williams, current President of the Federal Reserve Bank of San Francisco and incoming President of the Federal Reserve Bank of New York, spoke to the Economic Club of Minnesota this morning.  While the headline talking points reflected Williams’ view of still expecting 3-4 rates hikes being warranted in 2018, equally important were his comments relative to the neutral rate, also known as normal interest rate.  The neutral rate, is the Fed Funds rate target when the economy is operating at the “optimal” level -- any higher rate settings would be employed to cool off an overheating economy and any lower rate settings would be used to stimulate a sluggish economy.  “With a new normal for short-term rates of around 2.5%, interest rates are likely to remain low relative to historical experience,” he said.  Recently some economists have suggested that the neutral rate could be closer to 3% or higher -- a view Williams doesn’t seem to share as he stated, “I don’t yet see convincing evidence of such a shift”.

 

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