10-year T-note yield breaks out to 6-3/4 year high with negative consequences for stocks
120 U.S. companies and trade groups deliver statements on U.S. tariffs as public comment period draws to an end
U.S. industrial production expected to show strength
Weekly EIA report
10-year T-note yield breaks out to 6-3/4 year high with negative consequences for stocks — The 10-year T-note yield on Tuesday rose sharply to post a new 6-3/4 year high of 3.09%, decisively taking out the previous high of 3.05% posted in early 2014. The 10-year T-note yield on Tuesday closed the day sharply higher by +6.4 bp at 3.07%. Now that the 10-year yield has taken out the 2014 high, there is little technical resistance to yields continuing to move higher.
Meanwhile, the 2-year T-note yield on Tuesday climbed to a new 9-3/4 year high of 2.58%. The 30-year T-note yield on Tuesday posted a 2-3/4 month high of 3.22% but managed to stay 1 bp below February’s 2-3/4 year high of 2.23% and 3 bp below the psychological level of 3.25%.
There wasn’t much news on Tuesday to push yields higher. The rise in yields was mostly due to longer-term bearish fundamentals such as (1) rising expectations for Fed rate hikes through 2020, (2) rising inflation expectations due to the strong economy and higher oil prices, and (3) rising Treasury debt supply due to the sharp increase in the U.S. budget deficit.
Rising inflation expectations were seen on Tuesday as the 10-year breakeven rate rose by +2.4 bp to 2.191%, which was just slightly below last Thursday’s 3-3/4 year high of 2.198%. June WTI crude oil futures on Tuesday edged to a new 3-1/2 year nearest-futures high, illustrating the continued upward pressure on crude oil prices from the violence in Gaza and the renewed sanctions on Iran. Europe seems to be making little progress thus far on convincing Iran that it can provide enough economic benefits to convince Iran to stay in the nuclear agreement.
Meanwhile, expectations for Fed rate hikes remain strong with the market expecting another 109.5 bp of rate hikes (4.4 rate hikes) though the end of 2019, reaching a record high. Incoming NY Fed President John Williams on Tuesday made matters worse by again mentioning the possibility of four rate hikes this year when he said that he is “very positive” about the U.S. economic outlook and that three or four rate hikes are still warranted in 2018.
Tuesday’s sharp increase in Treasury yields pushed the U.S. stock market lower. The S&P 500 index on Tuesday fell back from Monday’s 2-month high and closed the day with a loss of -0.68%. The Nasdaq 100 index showed a larger loss of -1.09%.
120 U.S. companies and trade groups deliver statements on U.S. tariffs as public comment period draws to an end — Some 120 companies and trade groups are expressing mostly opposition to President Trump’s proposal for a 25% tariff on $50 billion of Chinese imports in hearings held this week on Tuesday through Thursday. Most support trying to level the playing field with China but oppose tariffs. In a representative comment, the U.S. Chamber of Commerce said, “Tariffs are hidden, regressive taxes that will be paid by U.S. businesses and consumers, paradoxically harming U.S. competitiveness.”
The public comment period for the proposed tariff ends next Tuesday (May 22). After May 22, the Trump administration is free to announce the tariff’s implementation at any time, if that becomes the final decision. The Trump administration will likely delay an announcement if trade talks with China appear to be bearing fruit. On the other hand, if the Trump administration goes ahead with its tariff, then China has already announced that it will levy a retaliatory 25% tariff on a broad list of $25 billion worth of U.S. products. President Trump has said that he would respond to that retaliation with a tariff on another $100 billion worth of Chinese goods.
The markets are watching for any progress on U.S.-Chinese trade talks after Chinese Vice Premier Liu He arrived in Washington yesterday for talks through Saturday. The two sides at least seem to be engaging in some serious negotiations with the WSJ on Monday reporting that the U.S. might soften its enforcement action against ZTE Corp in exchange for China foregoing sanctions on U.S. agriculture products.
In some good news, the Treasury announced on Tuesday that Chinese holdings of U.S. Treasury securities in March rose by $11 billion to $1.19 trillion. That suggested that China is not lightening up on its Treasury holdings as yet in response to U.S. tariff threats. China is the single largest holder of U.S. Treasury securities.
U.S. industrial production expected to show strength — Today’s April industrial production report is expected to be strong at +0.6% (after March’s +0.5%) and manufacturing production is also expected to be strong at +0.5% (after March’s +0.1%). U.S. manufacturing production growth in March rose to a 5-3/4 year high of +3.0% y/y as the manufacturing sector churns out products to meet strong domestic and overseas demand. The ISM manufacturing index fell by -3.5 points in March-April but remained in relatively strong shape at 57.3 in April. The new orders index was even stronger at 61.2 in April, illustrating a strong orders pipeline.
Weekly EIA report — The market consensus for today’s weekly EIA report is for a -1.75 mln bbl decline in U.S. crude oil inventories, a -1.25 mln bbl decline in gasoline inventories, and a -1.7 mln bbl decline in distillate inventories. U.S. crude oil inventories are -2.6% below the 5-year seasonal average, just a bit more ample than April’s 9-1/2 year low of -3.3%. Gasoline inventories are +3.5% above average while distillate inventories are -14.1% below average. U.S. crude oil production in last week’s EIA report rose by +0.8% w/w to a new record high of 10.703 million bpd.