Select Page


 

  • U.S. yield curve flattens to new 3-month low on neutral Fed and soft inflation outlook
  • EU says trade talks could start in April as reports emerge that Commerce Dept recommended auto tariffs
  • EU gives UK an extra two weeks for a Brexit decision
  • U.S. Feb existing home sales expected to rebound higher from 3-1/4 year low
 

U.S. yield curve flattens to new 3-month low on neutral Fed and soft inflation outlook — The 2s10s T-note spread on Thursday flattened to a 3-month low of 13 bp, where it was only 2 bp above the 12-year low of 11 bp seen last December.  The yield curve has flattened because the 10-year T-note yield over the past two sessions has fallen by more than the 2-year yield.  The 10-year T-note yield on Thursday in fact fell to a new 14-month low of 2.498% before rebounding a bit higher to close +1.1 bp at 2.537%.

The 10-year T-note yield this week has fallen farther than short-term yields because short-term rates are essentially locked in place while the Fed pursues its neutral wait-and-see strategy.  Meanwhile, the 10-year T-note yield is falling because of (1) the reduced threat of higher short-term rates over the next few years, (2) Fed Chair Powell’s focus on persistently low inflation in the Fed’s explanation for why they shifted to a neutral policy, (3) the general weakness in the global economic outlook due to trade tensions and slowing Chinese and European growth, and (4) the Fed’s earlier-than-expected halt in its balance sheet drawdown program with a tapering starting in May and the program ending by September.

The end of the Fed’s balance sheet drawdown program means that the Fed will be back in the market buying Treasury securities with the proceeds from maturing Treasuries.  In addition, the Fed starting in October will replace maturing mortgage-backed securities with Treasury purchases, providing an extra boost for T-note prices.

 

 

EU says trade talks could start in April as reports emerge that Commerce Dept recommended auto tariffs — EU Trade Commissioner Malmstrom on Thursday said that she may get the mandate in April from EU Parliament to begin formal trade negotiations with the U.S.  Ms. Malmstrom knows that President Trump is getting impatient since it has been eight months since Mr. Trump and European Commission President Juncker agreed on US/EU trade talks and a cease-fire on any new tariffs.

Ms. Malmstrom’s reassurance that talks will begin soon came only a day after Politico on Wednesday reported that the Commerce Department’s report to President Trump in fact recommended that President Trump impose tariffs on imported autos on national security grounds.  The administration has kept the conclusions of that report secret.  However, the markets have assumed that the report recommended tariffs since Mr. Trump raised no public objections when the report was delivered to the White House.  The Commerce Dept previously recommended tariffs on steel and aluminum imports based on national security grounds, which means that a recommendation for tariffs on autos on the same national security grounds wouldn’t require any new leap in thinking.

The threat of U.S. tariffs on imported autos is mainly meant as a negotiating cudgel against the EU and Japan.  The U.S. is trying to get the EU to negotiate agriculture trade as well, but so far the EU has flatly refused and is only willing to discuss autos and industrial goods.  The global stock markets would likely take a heavy hit if President Trump were to suddenly announce tariffs on European and/or Japanese autos.

On the US/Chinese trade front, China’s government on Thursday confirmed that USTR Lighthizer and Treasury Secretary Mnuchin will visit China for trade talks next Thursday and Friday (March 28-29).  Chinese Vice Premier Liu will then reportedly visit the U.S. in early April.  The WSJ on Tuesday said the U.S. and China are trying to wrap up their talks by late April.

EU gives UK an extra two weeks for a Brexit decision — EU leaders at their 2-day summit that began yesterday decided to offer the UK an unconditional 2-week extension of the Brexit deadline from March 29 until April 12 regardless of whether Parliament next week passes a Brexit deal.  Prime Minister May will now have an extra two weeks to try to get her Brexit bill passed by Parliament.  If the UK Parliament still cannot pass the Brexit bill by the April 12, then the UK will either have to go cold turkey with a no-deal Brexit on April 12, or ask for a long extension of 9 months or more and in addition hold elections for the EU Parliament.

The EU based its timing on the upcoming elections to the European Parliament that begin on March 23.  The EU has to make sure that the UK will in fact hold EU elections if it turns out the UK will remain in the EU past the July 2 beginning of the EU Parliamentary session.  If the UK remained in the EU but did not seat European members of Parliament, then the legality of the entire Parliamentary session would be called into question.  Because of the time needed to plan elections, the UK must decide by April 12 whether it plans to remain in the EU after July 2, leading to the determination of the new extension date.

The EU is finally putting its foot down on trying to force the UK Parliament into a decision on Brexit. The odds are still low for a no-deal Brexit by April 1 at 25%, according to oddschecker.com.  The odds will likely be similar for a no-deal Brexit on the new extension date of April 12.

U.S. Feb existing home sales expected to rebound higher from 3-1/4 year low — The consensus is for today’s Feb existing home sales report to show a +3.2% increase to 5.10 million, rebounding a bit from Jan’s -1.2% decline to a 3-1/4 year low of 4.94 million.  U.S. home sales slid during 2018 mainly because of the rise in the 30-year mortgage rate during 2018 by nearly one full percentage point to an 8-year high of 4.94% in November.  However, the 30-year mortgage rate has since dropped sharply by -66 bp to the current 13-month low of 4.28%, which is providing some support for home sales.

CCSTrade
Share This