Yesterday the reaction to the ECB decision to keep its negative rates through 2019 and end its bond buying by the end of this year supported German bunds. It then followed into the US with a nice rally pushing the 10-yr note yield down 4 bps and MBS prices up 22 bps. This morning President Trump did what he said he would do. He put $50B tariffs on Chinese imports, mainly high tech US exports. A 25% tariff would be imposed on a list of strategically important imports from China. He also vowed further measures if Beijing struck back. The U.S. is scheduled to release the updated list today and implement them soon. A second list of tariffs on $100B of Chinese goods is almost complete, Reuters reported. Beijing warned that all previous agreements will be dead in the water if Trump presses on.
“The United States will pursue additional tariffs if China engages in retaliatory measures, such as imposing new tariffs on United States goods, services, or agricultural products; raising non-tariff barriers or taking punitive actions against American exporters or American companies operating in China,” Trump said in a statement. Earlier China vowed to hit back. If it does as we would expect Trump’s plan would put an additional $100B of tariffs on China. The US has a $375B trade gap with China. “If the United States takes unilateral, protectionist measures, harming China’s interests, we will quickly react and take necessary steps to resolutely protect our fair, legitimate rights,” Chinese Foreign Ministry spokesman Geng Shuang commented. Trade is looking increasingly more deleterious as Trump continues to ramp up his threats with actions.
In Europe, German Chancellor Angela Merkel added additional trade fears. Trump wants to add tariffs on auto imports from Europe that will hurt German and other Europe countries. She warned Europe’s strategic interests rode on the future of Europe’s car industry and hinted at competition probes of U.S. internet giants. “We should think about the strategic significance of the auto industry for the European Union so we can prepare an exchange with the U.S.,” she said.
While yesterday’s focus was on the ECB meeting, the Bank of Japan also held its meeting. It left its quantitative easing program in place and downgraded its assessment of inflation. The Bank maintained the levels on its yield-curve control program and asset purchases, but now sees the core consumer price index in a range of 0.5% to 1 percent, from around 1 percent previously.
The tariffs news has pushed the US 10-yr note yield to 2.91% early this morning, at the bottom of the recent 15 session range.
Not that it is significant this morning, but the June NY Empire State manufacturing index was better than 19.6 expected, increasing to 25.0 from 20.1 in May.
At 9:15 am EST May industrial production, expected +0.1% declined 0.1%, but April revised to +0.9% from +0.7%; manufacturing declined 0.7% from +0.6% in April. May capacity utilization was expected at 78.0%, it dropped to 77.9% from a revised 78.1% in April.
At 9:30 am the DJIA opened -158 better than -188 where it traded at 8:00 am in the futures markets; NASDAQ opened -39, S&P -11. The 10-yr note yield 2.91% -2.5 bps.
At 10:00 am the mid-month U. of Michigan consumer sentiment index, expected at 98.7 from April, went to 98.0; the index increased to 99.3.
Here we are (again) at the 10-yr key near-term resistance at 2.90%; the note has not moved out of its range between 3.00% and 2.90% since May 24th. If 2.90% were to be taken out, the 10-yr projection would be down to 2.84% and MBS prices would increase about 35 bps. Japan’s lowering its inflation outlook yesterday adds a little support but our Fed is expected to continue pushing the Federal Fund rate higher by 50 more basis points by the end of the year. The US economy is on fire and the flames are increasing while in Europe and other key economies the recent data has been reflecting some slowing. Escalating trade issues added some support to US and German rate markets mostly on safety considerations.Source: TBWS
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