US 10-year Treasuries gave back 6 basis points last week, following the 52 basis point rally in August, as equity markets rose on modest consumer data, talk of concessions in Hong Kong and further materialisation of central bank policy easing expectations. The S&P 500 was up 1.8% despite the week starting with the introduction of new consumer-focused tariffs from both the US and China. And although the US managed to maintain a marginally positive PMI reading (with now 75% of developed nations’ latest readings under 50) the latest US ISM undershot significantly, at 49.1, signalling further weakness in the cycle.
Last week’s mix of political disruptions and further weak data helped push US 10-year Treasury yields down 4 basis points to close out the week back below 1.5%. This marks the fifth consecutive week of Treasury and broader high-grade bond gains, with 14 of the last 17 weeks marking falling Treasury yields. Last week however equities were also up, with the S&P 500 posting a 2.8% rally after poor performance in all the earlier weeks of August.
Another rollercoaster week ended with the S&P 500 down -1% and long-dated Treasury yields pushing all-time lows of below 2%. The Dow Jones Industrial Average fell more than -3% on Wednesday alone (which nowadays can be exaggerated as the fourth ever >800 point fall) but retraced half of this loss by weekend to close down -1.5%. Earlier in the week, positive news that Trump had delayed some of his proposed China tariffs until mid-December supported markets for less than a day.
Equity markets remained depressed last week but muted in comparison to the sharp sell-off from the prior week. The S&P 500 fell half a percent on the week as US 10-year Treasury yields fell a further 10 basis points, closing the week at just 1.75% with similar Bund yields falling a further 8 basis points to -0.58%; meanwhile, the Japanese yen strengthened a further point to 105.7 versus the dollar. Numerous growing trade tensions and political upsets helped feed ongoing risk-off sentiments. However, markets gained some composure towards the end of the week, paring losses and preventing a repeat of the previous week.
The Fed cut rates for the first time in a decade although there were two dissenters; they also announced they will stop their balance sheet runoff two months ahead of schedule now in August. However, there were conflicting messages in the press conference where Chairman Powell described the cut as a “mid-term policy correction” and intended to “insure against downside risks from weak growth and trade uncertainties” only then to comment that he was concerned for the risks to global growth, manufacturing and below-target inflation. This caused a stormy session for bond yields and the stock market.
Central Banks were and are firmly in focus, with important policy speeches from the ECB last week and an expected rate cut from the FOMC in the week ahead; in addition to forthcoming rate decisions from the Bank of Japan and the Bank of England. We’re also in the middle of a fortnight of PMI releases which began last week with a number of downside surprises, notably in Germany, and a downward revision to global growth, raising concerns that a similar narrative will play out across the US and China in the week ahead; also ahead are a range of inflation data, the much-watched non-farm payrolls and resumed trade talks in Shanghai.
After holding above the 3,000 level from the previous Friday until last Tuesday, the S&P 500 sold-off towards the end of the week to close at 2,976, down 1.23%. US Treasury 10-year yields trimmed 7 basis points, pulling-back to just 2.05% following further threats from Trump of a $325 billion hike on Chinese import tariffs and somewhat weak corporate earnings throughout the week - notably a number of major technology stocks, large banks and energy companies. Global growth concerns also rose to the forefront again after China posited its weakest rate of growth in 27 years; the second-quarter GDP figures showed the economy slowed to 6.2% from a year ago.
There were modest gains in equities last week with the S&P 500 gaining 0.8%, but this small gain signalled not only new highs but closed the week above 3,000 for the first time. With the backdrop centred around trade tensions affecting the global economy and central bank watching, market moves this week encapsulated the recent upside surprise in US employment data from previous week as well as last week’s comments from Fed Chair, Jerome Powell, in-light of this stronger than expected data. Treasuries lost some ground, with 10-year yields gaining 9 basis points over the week to close at 2.12%.
After eight straight weeks of Treasury yields falling from over 2.5% to 2% we saw some very slight pull-back last week as 10-year yields rose 3 basis points to close out the week at 2.03%. Correspondingly equity valuations were boosted on a mix of good data with the S&P 500 pushing new highs and closing the week up 1.65% at 2,990, just 0.3% below 3k.
The meek pick-up in markets has continued in the wake of the fragile trade truce between the US and China agreed at the G20 last week, with this optimism then boosted by a week of upside surprises in PMI, ISM and non-farm payroll data with the last of these coming in at 224k versus estimates of 160k. Taken together with the other resilient indicators, the stronger payroll headline should dispel the calls for a 50bp ease at the end of July meeting, but 25bp is still likely given the Fed does not meet in August. After July the next meeting is September 18th so we have two more NFPs by then. Of course, trade frictions and the President’s involvement could have a massive impact in the meantime.
Over in Europe, the data painted a broadly weaker picture with a -2.2% slump in Germany factory orders, far worse than the predicted -0.2%. At least the markets seemed to welcome the proposals for the next European Central Bank Chair, Christine Lagarde, and European Commission President, Ursula von der Leyen. Lagarde is seen as a tame and tolerable choice who symbolises a likely continuation of Draghi’s accommodative policies but also signals the further trend of central bank politicisation as – like Jerome Powell - she is not your usual hardened economist.
Forthcoming economic data includes Japan machinery orders and balance of payment data in addition to Germany trade and industrial production on Monday; this is followed by Australia business confidence on Tuesday and Australia consumer confidence on Wednesday, along with UK trade balance, GDP, industrial and construction output, China inflation and FOMC minutes. On Thursday are US, Germany and France inflation data, followed by China trade and foreign direct investment data, Japan and Euro area industrial production and US PPI on Friday.
US 10-Year Treasury yields closed the week (and month/quarter) a fraction of a basis point above 2% after falling a further 5 basis points in what is now an 8-week rally; equities waned a little with the S&P 500 down -0.3% on the week. Much of the week saw muted trading in anticipation of the weekend’s G20 summit offsetting some of the usual end of month/quarter activity. Meanwhile, in Europe Bund 10-year yields fell further into new negative territory reaching -0.335% with credit markets on the whole benefiting from further support.
Central banks were front and centre last week with significant dovish comments from Draghi and others at the annual European Central Bank Forum and from the Fed rates announcement. Optimistic market sentiment was boosted further by expectations of a reopening of US-China trade talks at the forthcoming G20, with a number of poor economic data readings having little dampening effect on the positive trend. US 10-year Treasury yields – after dipping below 2% midweek – closed out the week just 3 basis points lower but continued the 8-week downward trend to 2.05%. Meanwhile, the S&P 500 touched new-intraday-highs of 2,964, and closed the week up 2.2% at 2,950, with notable performance in energy stocks in-line with the bounce in oil prices. While equity markets are rising on expectations of lower-for-longer-rates helping prop flagging growth, credit markets are tightening over growth concerns and falling inflation expectations.
Last week we saw the short-end of the market start to price in three 25bp cuts to the funds rate this year and then nothing more, which is a little strange. Some argue for an ‘insurance cut’ as early as this week’s FOMC meeting sighting the Middle East situation, trade tensions and some further evidence of economic weakness, notably the last payrolls data. We feel a cut this week is unlikely; it is also unlikely that the Fed would cut three times and stop as the market is pricing.
Last week saw US 10-year Treasury yields tightening again - another 4 basis points to 2.08% - now yielding half-a-percent lower than just 6 weeks ago. Safe-haven assets were boosted by further concerns of tariffs on Mexico at the start of the week, along with a disappointing nonfarm payroll figure on Friday which, at just 75k, came in 100k below the 175k consensus estimate (and a downward revision to the previous month’s reading). But unlike most of May, as Treasuries rallied equities were also on the front foot last week, with the S&P 500 up a sharp 4.4% to 2,783, marking the best week for equities in six months. Meanwhile, just after Greek government yields hit all-time lows the European Commission issued a warning, for both Greece and Italy, that their recent policy choices will hinder their ability to service their debts and meet set targets.
The slide in equities and US Treasury yields accelerated last week; the 10-year saw yields fall 20 basis points to 2.12%: in a fifth straight week of strengthening from 2.6% in mid-April and demonstrating a strong seven-month trend from November 2018 highs above 3.2%. the S&P 500 had its fourth down week in a row, down 2.6%, and its worst since the tumult around Christmas 2018. Meanwhile, German 10-year Bund yields hit all-time lows of -0.206%: even lower than the negative yields back in mid-2016 when the US 10-year yielded 1.35%. Other negative sentiment signals this week include the Japanese yen strengthening 1% to 108.3 against the dollar, and Emerging Market spreads widening 15-20 basis points (contributing to spreads around 10% higher than at the start of the month but with yields broadly unchanged as risk-off assets rally in isolation).
After a terrible start to the week, the S&P 500 closed down just -0.76%. US “trade tensions” with the EU and “trade war” with China continued to escalate at the beginning of last week. But following a big dip on Monday, President Trump signalled a postponement of tariffs on European autos helping allay fears, at least in relation to US and European markets. The brinkmanship with China, however, continues with the blacklisting of Huawei in a tat-for-tit against China’s retaliatory 25% tariffs on a further $60 billion of imports after trade talks fell through the week before last.
Last week was all about the rising trade tensions between the US and China which resulted in ten year UST notes 5bp lower in yield and the S&P 500 index nearly 3% lower on the week.
The threat of tariffs reaches beyond US-China to the US’ other trading partners such as Europe and Japan. Trump has been threatening to impose tariffs on auto imports and a ‘section 232’ report from the US Department of Commerce on February 17 opened the door for him to impose 25% tariffs on auto imports on national security grounds: the President has 90 days to make a decision on this, although with opposition from Congress and with trade talks ongoing the decision could get delayed. Europe agreed a mandate in April to begin negotiations with the US on industrial goods although has threatened to suspend negotiations if auto or further tariffs are imposed.
With the Easter holidays the week got off to a slow start. There was talk from the Federal Reserve officials about the conditions under which they would cut interest rates, including a scenario where inflation drifts lower even if the economic growth doesn't falter. Such a scenario isn't seen as particularly likely, and they said a rate cut isn't imminent or under consideration for their meeting April 30-May 1. However, the threshold for such action has been a topic of conversation in recent interviews and public remarks.
In the markets, the S&P 500 touched fresh highs, closing the week just shy of 2,940, after gaining 1.2% on the week. US Treasuries made parallel gains with 10-year yields falling 6 basis points and back below 2.5%. Meanwhile, the US dollar made further gains with the DXY Index closing out the week by pushing above 98 for the first time in nearly 2 years.
Last week was a continuation of markets cautiously venturing further into a risk-on environment with the S&P 500 and MSCI World both up around a half percent and US 10-year Treasury yields moving 7 basis points higher, following the 9 basis point move the previous week. One driving factor was reassurances out of the ECB meeting which, along with leaving rates unchanged, signaled favourable conditions for the forthcoming round of TLTROs in September. Another factor was, of course, the further extension of the Brexit deadline: which prevented a hard Brexit on Friday just gone but will prolong uncertainty without giving much time for a public vote on either the deal or a new Government. With this still short lifeline given, Parliament have now changed gear to reach a compromise: agreeing to recess for a couple of weeks over Easter. Some discussions remain ongoing but the spluttering and stalling and persistent market concerns have been evident in the FX markets: where sterling has remained somewhat range-bound despite the real and imminent no-deal scenario being averted. Perhaps some are balancing the deal positives with potential political negatives with the latest poll data adding to concerns of a Corbyn government within the year.
Although economic data was mixed last week, equities pushed higher as markets seemed to focus more on the positive services data versus the weaker narrative seen in some manufacturing data: including undershooting PMIs and most notably abysmal factory orders out of Germany (although China’s manufacturing PMI was stronger on the back of stimulus measures). Both the S&P 500 and MSCI World indices were up 2% last week; meanwhile cyclicals, financials and technology outperformed defensives and US 10-year Treasuries sold off 9 basis points to yields of 2.5%. Once again, the US-China trade deal was said to be getting “closer and closer” according to the Director of the US National Economic Council, Larry Kudlow, and it does finally feel like this turtle facing headwinds is nearing a finishing line: at least with stage one of the negotiations expected to be signed-off by June.
US Treasuries closed out a fourth week of gains, with yields falling a further 4 basis points on the 10-year to yields of 2.4%; this brought the rally in Treasuries for the month of March to over 30 basis points. Equities also performed over the last week of March with the S&P 500 up 1.2% closing up 1.8% on the month to cement in steady monthly gains for the first quarter of 2019. It seems equities are still focusing on the stimulus effects of the recent more accommodative stance of the Fed; whereas the bond market is putting more importance on the move as another warning sign of a looming cyclical slowdown, and even near-term prospect of a recession following the US yield curve (briefly) inverting between the 3-month and 10-year points.