I meant to make this blog weekly but want to update you with causes of inter-day events when they are important.
- The UST 10 year fell 27/32’s today. The yield increased from Friday’s 2.407% close to 2.503% at the close today.
- The immediate cause was an event over the weekend- strong Chinese manufacturing data.
- In yesterday’s blog report, we traced the movement of the UST 10-year from the 3.23% high yield in October and December of last year to the 2.35% low yield reached last Thursday.
- That reduction in rates began when weak Chinese economic data, combined with reductions in estimates of Europe’s growth (GDP from 1.9% to 1.1% for 2019), started a powerful narrative in the US. That narrative was that slowing Chinese and EU growth, combined with increased financial tightness due to the Fed’s 2.25% increase in the funds rate since 12/15, would lead to a slowdown in US growth. It could also lead to a recession, or worse, create the conditions for deflation.
The strong Chinese manufacturing data caused world fixed income markets to open down in price and up in yield this morning (see the middle of Chart 2).
Chart 2: UST 10-year Note Price on Friday (LHS of the chart) and Monday, April 1 (RHS of the chart)
- After trading 102-04 Friday (2.375%) we closed 101-29 (2.407%).
- This (Monday) morning, news of strong Chinese PMI sent UST 10s to 2.44% (see the price at 101-17 at 8am on RHS of the chart), a support level. Strong data weakens the narrative that the global economy is slowing and that the US will slow as well. Anything that does that causes rates to rise.
- Then at 8:30 Retail Sales came out.
The Feb Retail Sales numbers were weak. Looked like the market was going up.
- Then guys looked at the revisions. Revisions to January were strongly positive and roughly offsetting, with the headline rising to +0.7% from +0.2%, ex-autos to +1.4% from +0.9%, and control to +1.7% from +1.1%.
- So, given the January numbers were revised to show the economy may not be losing steam, at 830 the market continued down to 2.50% on UST 10s. It appears the holiday and Q1 seasonal adjustments on Retail Sales and GDP are fubar.
The Yield Curve
The 2-year/5-year spread, which was -8 a week ago, steepened in to -1. That means 5s, which were 8 bps lower in yield than 2s, are now only 1 less. That means the delayed easing expected by the market of the Fed seems much less likely now. The Chinese data did great damage to the narrative of a slowing global economy. That may be temporary if US data, particularly Payrolls on Friday, is weak.
- We need to hold 2.50% on 10s and see if the market can recapture 2.44%.
- Behind 2.50%, the next support is 2.54%, behind that 2.63%, which took 17 attempts to break through.
- The key for the bulls is to capture and close inside of 2.34%, one of the most important levels in the market and one it will take some very weak data to overcome.