The Daily Update - Tin Helmet Time

The US Treasury market continues to perform well with yields dropping a further 4bp across the curve yesterday putting the benchmark 10-year bond at a 2% yield. The shorter end of the curve continues to price in three rate cuts this year as expectations for a trade friction induced slowdown is clearly the dominant view. True to form, President Trump continued to put pressure on the FOMC calling them a ‘stubborn child’ for not cutting rates at their last meeting.

Then up popped Fed member Robert Kaplan, a non-voter, warning that ‘adding monetary stimulus at this juncture, would contribute to a build-up of excesses and imbalances in the economy which may ultimately prove to be difficult and painful to manage.’ Interesting were his thoughts on the tight employment market where he said ‘We believe that job growth in the range of 60,000 to 120,000 per month will be consistent with a strong jobs market for the remainder of 2019’. It is worth remembering that the May Non-Farm Payrolls came in at just 75,000 when the market was looking for a nearly 200,000 number.

On inflation, which sat at 1.5% in the year through to April, way below the Fed’s 2% target level, he sounded less worried than some of his colleagues and actually doubted that the tight labour market would produce problematical pricing pressure due to the inability for companies to raise prices adding ‘That’s just as likely to lead to business margin erosion’ than higher prices.

After reading through Kaplan’s thoughts it hard to see why the Fed would not cut rates in July as the risks certainly appear to the downside for the economy after its extended period of expansion, the geopolitical headwinds, growing crosswinds and that’s without Trump focussing on his next country of target whom-ever that maybe. If I was Canadian, living so close, I would reach for the tin helmet.

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