Early Market Stability, but will it Last?

• Treasury yields are moving lower this morning as some tariff angst is removed but by no means for good. Despite the move lower today, yields have certainly engaged in a bearish trend of late. We were off last week (what a week to be away) and when we last reported on April 4^th,  the 2yr was at 3.86% and the 10yr at 4.20%. After all the machinations from last week, the 10yr opens the week yielding 4.44%, down 5bps on the day, while the 2yr is yielding 3.92%, down 4bps. Equities look to open higher.

• Despite the positive early indications for both stocks and bonds, uncertainty remains the watchword of the day. Two days after the late-Friday announcement of tariff exemptions on specified technology goods – specifically smartphones, computers, chips, etc. – Trump and the White House downplayed the significance of such exemptions while you were watching the Masters. The President went to social media to post that, “NOBODY is getting ‘off the hook’ … “There was no Tariff ‘exception’ announced on Friday. These products are subject to the existing 20% Fentanyl Tariffs, and they are just moving to a different Tariff ‘bucket.’ … “We are taking a look at Semiconductors and the WHOLE ELECTRONICS SUPPLY CHAIN in the upcoming National Security Tariff Investigations.” Later, President Trump told reporters, “The tariffs on semiconductors will be in place in the not-too-distant future” … “I’m going to be announcing it over the next week.” So, exemptions one day and one day not, or so it seems. Stay tuned.

• Today’s non-tariff news events will be the release of the New York Fed Consumer Survey later this morning and Fed Governor Waller’s speech on the economic outlook this afternoon (includes text/Q&A). We heard some talk from Boston Fed President Collins over the weekend that the Fed is watching market stability and would step in if it looked to be needing help, but for so far the action has been “orderly.” So, we’ll be intent on any discussion from Waller on his view of both the economic outlook and thoughts on potential Fed intervention.

• Within the consumer survey, after the surge in the U. of Mich sentiment survey, special attention will be paid to medium/long-term inflation expectations. On Friday, NY Fed President Williams offered a reminder of the importance of such measures in that, “During times of turbulence and uncertainty such as these, well-anchored longer-run inflation expectations are critically important for ensuring sustained price stability… It is critically important to keep inflation expectations well anchored as we pursue our goals of maximum employment and returning inflation to our 2% longer-run objective.” While the U. of Mich interest rate sentiment shift higher seemed anything but “well-anchored” we’ll see if Waller adds any insight into how the latest survey data is being interpreted at the Fed’s highest levels.

• The big news to us, after watching the market from afar is the upward move in yields despite the friendly CPI and PPI reports, and indications that PCE will be similarly so. In addition, sponsorship was solid in the 10yr and 30yr auctions so what has been driving the upward thrust in yield (and downward move in the dollar)? The early speculation is that all the scattershot tariff maneuvers, and unilateral declarations, have global investors rethinking the safe haven status of US Treasuries and US assets more generally.  It is an ominous development, and if true could carry the risk of pushing yields demonstrably higher. Yet, a possible ominous rationale is one thing, but a myriad of investors trade for their own needs and agenda. So, what may look like an orchestrated effort could be anything but. In the end, it does require watching but keep an open mind to the overall global forces at play in these early innings of the trade war.

• The highlight of the data calendar will be Wednesday with the March Retail Sales report. The spending update will help round out estimates for Q1 growth with the Atlanta Fed’s GDP Now model running at -2.4%. Despite all the consternation over heavy pre-tariff import buying that skews GDP lower, after January and February’s tepid spending data, the first quarter is shaping up for a significant slowing in said spending and GDP is unlikely provide a strong contribution from real personal spending, and recall that the economy still rests on two-thirds consumer consumption. Despite a surprisingly strong showing for the Retail Sales Control Group in February (+1.0%), the 3-month average annualized pace fell to 2.6% – the lowest in almost a year. For context, this is 2.1 percentage points below December’s 4.7% 3-month average annualized rate. Control Group sales are expected to increase by a solid +0.6% in March, yet this would bring the 3-month average annualized rate down to 2.1%. Thus, if expectations are met, the Retail Sales Report is likely to reinforce the slowing growth outlook.

Futures Still Predicting Rate Cut at June FOMC Meeting

Source: CME

US Dollar Declining With Treasury Prices 

Treasury Selloff Has Steepened the 10yr – 2yr Treasury Curve