Kevin Giddis, Chief Fixed Income Strategist, weighs in on recent bond market events and current influencing factors.
The Treasury market is trading higher this morning mainly because the markets seem to be reactive to only trade-related news, especially if China is involved. Just as the Chinese delegation comes to town, each country seems to be doing things to add pressure to the negotiations. Whether it is the U.S. floating the idea of restricting capital investment in China, to the Chinese stopping broadcasts of NBA games in China, each side appears to want to get a few punches in before sitting down at the table. Then there is the deal itself. The White House says that there cannot be a partial deal for China, although it is willing to do them for other countries. So, the market is left to speculate whether this is more of the “art of the deal” or a stand until the end.
Whatever happens, it will be the focus of both the bond and stock markets, posting winners and losers until the final outcome can be achieved, if one really can be achieved. One thing that seems certain for now, a trade deal, likely of any kind, would be generally good for the equity market and the economic growth of both countries, and “no deal” is likely good for bond prices, and generally bad for each countries economic growth. In the middle of this rocky road is the Fed. There are three weeks before the FOMC meets, and this week is one where a number of Fed officials, including the Chair, will be on the tape giving speeches. The “art” for them will be to be engaged, but not to get pulled into commenting on U.S.-China trade relations as it pertains to future monetary policy.
On the economic front, we got the Producer Price Index for September this morning, which came in at down 0.3% as a headline number as well as a core number. This takes the year-over-year number down to 1.4% and 2.0%, respectively. Those are big declines, but the proof in the pudding will be with Thursday’s Consumer Price Index, which is expected to come in at up 0.1% as a headline number and up 0.2% as a core number. The bond market will likely care more about this data than the equity market, but low inflation tends to be a friend to all markets, so today’s numbers should be viewed favorably.
So where in the heck does all of this take us? As I see it, for the sake of the markets, a trade deal with China is a must for the continuation of economic growth, and avoidance of a recession. It seems to be that simple, and in absence of one, expect growth to continue to fall and the real recession indicators to go up. The Fed understands what it must do should these talks fail or the realization that a trade deal can’t be done at this time, which is to lower rates in an effort to keep the U.S. economy “running in place” for a while longer. Does anyone really think that if the Fed is forced in to lower rates, any real good will come from it? I think at this point, the markets would prefer a trade deal, with the Fed on the sidelines vs. no deal and a series of FOMC rate cuts. Stay tuned. Your pain is real.
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