China Weakness Has Treasury Prices Higher

  • A trio of reports out of China overnight suggest the second largest global economy has hit another soft patch and that has risk assets on the back foot this morning with Treasuries in the green.


  • Retail sales, industrial production and investment all slowed in July and the jobless rate for the 16-24yr old cohort hit a record high of 19.9%. The central bank reacted with a 10bps rate cut on the one-year and 7-day lending rate. The move is not expected to bolster the economy much as both businesses and households show little interest in borrowing money given the ongoing property slump and rigid covid lockdown protocols.


  • The weakness in Chinese demand is spilling over into other developed economies as Germany and South Korea have reported weaker sales of manufactured goods.


  • We are seeing the impact of weaker Chinese demand this morning as oil prices are slumping by more than 5% bringing the price down to the $87 -$88 level. That’s the lowest level since March. That has the energy complex under pressure and that is putting equities in the red as the week opens for trading.


  • Our big economic release this week comes on Wednesday with July Retail Sales. Expectations are for sales to be modest but when adjusted for inflation will look somewhat better. Overall sales are expected up 0.1% vs. 1.0% in June. Keep in mind, however, that inflation ramped up 1.1% in June so real sales, adjusted for inflation, were negative -0.1% while July’s unchanged inflation reading means sales posted a real 0.1% gain.


  • The other big release also comes on Wednesday with the FOMC Minutes from the July meeting. Keep in mind the meeting came before the cooler July CPI report so the comments about fighting inflation are likely to look very hawkish just like most of the post-meeting rhetoric. Don’t look for any policy pivot in these minutes.  Attention will quickly turn to the Jackson Hole Symposium late next week where we’ll get the latest inflation fighting insight from Powell and Co.. Just like the minutes, we’re not expecting a policy pivot or the like at Jackson Hole. The Fed sees the recently cooler inflation numbers as a good thing, but just a start and with YoY rates still too high, the hawkish outlook should persist.


  • As mentioned, Treasury prices are higher across-the-curve this morning as investors react to the slowing global growth story off China’s soft economic releases. The 10yr Treasury sits at 2.79% up 10 ticks in price gains as the market falls into a range trade as late summer trading conditions take hold.

Source: Bloomberg


Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 3.25 3.25 3.22 3.26 3.40 3.85
0.50 3.24 3.22 3.16 3.14 3.26 3.75
1.00 3.23 3.19 3.13 3.10 3.17 3.62
2.00 3.17 3.07 3.02 3.05 NA
3.00 2.98 2.99 NA
4.00 2.94 NA
5.00 2.90 NA
10.00 NA

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Published: 08/16/22 Author: Thomas R. Fitzgerald