Not much movement in the mortgage markets today, the 10 yr did break that 2.90% resistance this morning declining to 2.87% early but slowly edged back through the day. The DJIA was walloped (at one time -419), but most of the decline in the index was from Caterpillar and other key stocks that would be seriously impacted if the trade issues were to actually lead to a prolonged trade war. Emerging market economies, already soft are being hit very hard.
The US believes China has underestimated Trump’s dedication to thwart China’s trade practices. The latest salvo, he has now threatened tariffs on up to $450B in China’s exports, out of a total of just over $500B in goods sold to the United States. A 10% tariff on $200B of Chinese goods in addition to the import duties previously announced on $50B in goods. White House trade adviser Peter Navarro said today, “The fundamental reality is that talk is cheap,” he told reporters on a conference call, saying China “may have underestimated the strong resolve of President Donald J. Trump.” He said China has more to lose if a trade war starts than the US. “If they thought that they could buy us off cheap with a few extra products sold and allow them to continue to steal our intellectual property and crown jewels, that was a miscalculation.”
This is a very real game of Chicken being played out; who will bend? Both will likely have to, but the administration believes China will have to bend the most. Economists complain that Trump’s efforts to reduce America’s deficit are misguided, saying the gap in trade with China reflects the underlying economy. Some believe Trump is bluffing, contrary to Navarro’s comments. Likely Trump is being viewed from the perspective of his book “The Art of the Deal” by China and other countries he has hit with tariffs already. Next up, talk circulating Trump will move next on tariffs on car imports. Lloyd Blankfein, CEO of Goldman, saying today Trump’s approach to China on trade may be “bluster.”… “I don’t know that we’re in a suicide pact on this. I suspect that we are not going to cause the economies to collapse.” I will side with Blankfein; still hold that at the end of the day trade issues will be resolved but don’t see it likely for many months, maybe a year. In the meantime, it is going to be tit for tat.
Tomorrow weekly MBA mortgage apps; May existing home sales expected at 5.52 mil +1.2%, and Q1 current account balance expected -$129.2B. Domestic data taking a rear seat now with trade swirling moment by moment.
US Treasuries benefited from safe haven moves, but not much. The 10 yield dipped just three basis points today; MBS prices hardly improved much. Technically a slight positive through the 10 at 2.89% showed little buying in US trading hours. Overnight the 10 yr yield dropped to 2.86%, at 7:00 am 2.87%, since then the yield edged up. Inflation rests under the trade fights like that alligator bidding its time waiting for lunch.Source: TBWS
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