Progress is needed in today’s U.S.-Chinese trade negotiations as time is running out
10-year T-note yield edges to another new 6-3/4 year high
Italian bond yields soar as populists consider a sovereign bond default
10-year TIPS yield reaches 4-3/4 year high
U.S. claims and LEI data
Progress is needed in today’s U.S.-Chinese trade negotiations as time is running out — Chinese Vice Premier Liu He, President Xi’s right-hand man on economic and trade policy, will hold talks today with Trump officials including Treasury Secretary Mnuchin, USTR Lighthizer, Commerce Secretary Ross, and others.
Bloomberg reported that White House trade advisor Peter Navarro, a noted Chinese trade hawk and author of “Death by China,” will be excluded from the meeting after reports out of the Trump camp that he had a spat with Mr. Mnuchin on the Trump team’s recent negotiating trip to China.
Vice Premier Liu on Wednesday met with a variety of Washington lawmakers and he may meet with President Trump before leaving Washington this Saturday.
The U.S. and China are far apart in their trade spat, although President Trump signaled some flexibility this past Sunday when he tweeted that he would work quickly to soften the Commerce Department’s sanctions on ZTE Corp. There has been some talk that Mr. Trump may be looking for a Chinese trade deal soon so that he can declare a victory and prevent a trade war involving U.S. agriculture exports ahead of this November’s mid-term election.
Officially, the U.S. has a long list of demands on China that include cutting the U.S.-Chinese trade deficit by $200 billion, ending state support for key industries, protecting U.S. IP, cutting tariffs to U.S. levels, and a variety of other items.
China has so far mostly stonewalled the Trump administration with only minor concessions. However, the clock is ticking towards the end of the 60-day comment period next Tuesday (May 22) for Mr. Trump’s proposed 25% tariff on $50 billion of Chinese goods. After May 22, the Trump administration will be free to announce the tariff’s implementation at any time, if that becomes the final decision.
The Trump administration will likely delay an implementation of tariffs 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 including soybeans. President Trump has said that he would respond to that with a tariff on another $100 billion worth of Chinese goods. If China retaliates on a total of $150 billion of U.S. goods, that would amount to a 25% tariff on all of America’s exports to China.
10-year T-note yield edges to another new 6-3/4 year high — The 10-year T-note yield on Tuesday edged to a new 6-3/4 year high of 3.102% and closed the day +2.4 bp at 3.096%. The 10-year yield this week has so far risen by +12.7 bp and has reached levels not seen since 2011.
This week’s surge in Treasury yields is due to bearish fundamentals such as (1) a new record high on Wednesday of +110 bp worth of expected Fed rate hikes through Dec 2019 (4.4 rate hikes), (2) rising inflation expectations with the 10-year breakeven rate on Wednesday edging to a new 3-3/4 year high of 2.20%, and (3) rising Treasury debt supply due to the sharp increase in the U.S. budget deficit.
Italian bond yields soar as populists consider a sovereign bond default — The 10-year Italian bond yield on Wednesday soared by 20.2 bp to a 4-1/4 month high of 151.1 bp on news that an early draft of the Five Star-League policy platform included a proposal for Italy to repudiate 250 billion euros worth of Italian bonds held by the ECB.
That idea was apparently dropped in later policy drafts. However, the fact that the parties even talked about that possibility made it clear that the two parties are reckless neophytes who are not aware of the consequences of their actions for the markets. German Chancellor Merkel is undoubtedly preparing her dressing down of these Italian political leaders for even considering the possibility that Europe would allow Italy to renege on its debts to the Eurozone. The markets are apparently going to face a rocky road if the Five Star and League parties are successful in agreeing on a coalition government.
10-year TIPS yield reaches 4-3/4 year high — The Treasury today will sell $11 billion of 10-year TIPS in a reopening of the 1/2% 10-year TIPS of Jan 2028 originally sold in January. The 10-year TIPS yesterday edged to a new 4-3/4 year high of 0.917% and closed the day up +1.7 bp at 0.911%. The strength in the 10-year TIPS yield reflects the strong economy and the increased demand for investment capital.
The 12-auction averages for the 10-year TIPS are as follows: 2.41 bid cover ratio, $25 million of non-competitive bids, 5.6 bp tail against the median yield, 12.3 bp tail against the low yield, and 59% taken at the high yield. The 10-year TIPS is the second most popular security among foreign investors and central banks behind the 30-year TIPS. Indirect bidders, a proxy for foreign buying, have taken an average of 69.0% of the last twelve 10-year TIPS auction, well above the median of 64.6% of all recent Treasury coupon auctions.
U.S. claims and LEI data — Today’s initial claims report is expected to show a +4,000 increase to 215,000 and continuing claims are expected to show a -10,000 decline to 1.780 million.
Meanwhile, today’s April LEI report is expected to show another solid increase of +0.4% m/m following March’s report of +0.5%. The LEI is in very strong shape at +6.2% y/y in March, just below Feb’s 7-year high of +6.5% y/y.