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.
So the mixed signals, of the lowest Treasury yields in two years alongside the best performance for US equities year to date, reflects the contrasting drivers in markets at present: increasing expectations of a near-term Fed rate cut(s) next to growing acceptance that there is more at stake in the US’s resistance to the “Made in China 2025” strategy; or the renewed mounting evidence of slower global growth set against the clear economic advances and disruptions of digitisation; or the seemingly unstoppable momentum of ongoing global leveraging contrasting the apparent ease with which corporate and indebted sovereigns are presently able to service debts at ever lower yields. These and other conundrums continue to add volatility across markets and test the resilience of the recent momentum in stocks and the resoluteness of the funds that have strayed into speculative grade bonds in the insatiable hunt for yield.
In this environment monitoring inflation expectations, global growth and economic activity remain key to positioning investments in what is that late-stage of the longest running economic expansion in history (ending May spanned 120 months equalling 1991-2001). Moreover we believe, investing in higher grade credit and avoiding corporates/sovereigns where there are excessive net foreign debts, combined with a value approach that reaches for yield only within the confides of attractive risk-adjusted returns, altogether creates a balanced approach with attractive yields along with an additional margin of protection.
Looking to the economic agenda for the week ahead, UK and China trade balance data is out on Monday along with UK industrial production and GDP figures. On Tuesday we have UK unemployment data and US PPI, followed by China’s PPI on Wednesday and CPI figures from both the US and China; further inflation data on Thursday with German CPI along with Eurozone industrial production. On Friday both China and the US publish data on retail sales and industrial production while the Eurozone release its latest trade balance data.