Fixed Income Market Commentary by Kevin Giddis

June 19, 2019

The Treasury market is trading slightly lower this morning as traders work to position themselves for one of the most important FOMC meetings in quite some time. The reason I say this is because there appears to be a certain amount of drama that usually doesn’t come with most FOMC meetings. The pressure the President is putting on the Chairman is unprecedented, at least not to this extent. The open criticism, the “leaked” report of looking at ways to oust or demote the Chairman of the Federal Reserve, the comments about the ECB, and the demand for the FOMC to cut rates now are now a part of what the FOMC must deal with today! Hopefully they will get around to looking at economic growth, employment, and inflation when determining the forward monetary policy of the United States. Depending on how you feel about it, this is either fun, exciting, or down right scary to see how this process will unfold. If we are able to concentrate solely on the meeting, look for the Fed to make some real changes in both their language and leanings. Look for the word “patience” to go “bye-bye.” I believe that the FOMC will be unanimous in their belief that due to continued low inflation, the committee will need to look at monetary policy in a different way. No longer will say they that inflation is “just around the corner” or that price pressures are on the horizon. No, quite the opposite is occurring and the Fed’s bigger concern, likely fueled on by the trade war, is that in addition to low inflation, economic growth is slowing and confidence is waning. But, and maybe right on que, the President announced that he and President Xi will have an extended meeting on trade at the G20 meeting in Japan next week. That gave the equity market a boost and sent yields higher in very active trading yesterday. So what does an investor do during this wild and crazy reality show that we have been experiencing? My advice is just we have all along, let’s stick to the facts. In spite of record employment, record equity values, and record corporate profits, the Fed has not yet figured out how to raise prices. Today they will likely acknowledge that and indicate that they will need to make some changes in order to keep from falling behind even more. The “globe” is once again slowing and look for the ECB to begin lowering (negative) rates, adding stimulus, and being very accommodative, which gives the Fed clear cover to lower rates soon. Will that happen today? Not likely, but probably next month, and under strong protest from the President of the United States. A trade deal would go a long way to helping resolve these issues.

Part II

Just a few thoughts on today’s Fed meeting, and how the fixed income market has responded since the meeting’s conclusion. The Fed has finally come around to something the market knew a few months ago, and that is that it doesn’t really understand, nor have the tools to reflate the modern U.S. economy. The thought that we have gone from inflation being “transitory” to being “patient “to being worried, all in a span of a few months should tell you what you need to know going forward. When speaking of inflation, They spoke of “uncertainties increasing.”  I would submit that those uncertainties have existed for almost two years!  The yield curve and the dollar have made expected moves since the meeting, and both are suggesting that the Fed will cut rates, and cut them soon, likely as much as 50 basis points when the Fed next meets in late July (July 30-31).  But the bond market is also suggesting that it won’t take much to push the economy forward and this isn’t the alarm for a recession anytime soon. The spread between the 2-year and the 10-year is closing in on 30 basis points, a steepness that we haven’t seen in almost nine months, or when things looked a lot better than they do now. So the takeaway should be that the Fed is now at the party, a U.S.-China trade deal would help a lot, and the U.S. economy is in better shape than most believe. Carry on.

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