Daily Market Color August 1, 2018Fed Holds Steady, Yields Continue to Rise FOMC Sees Strength in Economy Today the Fed concluded its two-day policy meeting with the unanimous decision to leave benchmark borrowing rates unchanged at a target range of 1.75%-2.00%, as expected. While there was no press conference at the conclusion of the meeting or updated Fed dot plot, the FOMC statement released afterwards reflected a sense of shared optimism amongst the Fed members with regard to the current state of the US economy: Household spending and business investment were noted to have grown strongly Inflation remaining near the Fed’s 2% target Strong job gains in recent months with unemployment remaining low Today’s comments seemed to further solidify the Fed’s intentions to hike rates at its next meeting (September 25-26), after which financial markets will turn their attention to the probability of a 4th hike in 2018 in December. A word-for-word comparison of today’s FOMC statement vs. June’s can be found here. Yields Back on the Rise The yield on the 10-year US Treasury climbed back above 3.00% for the first time in nearly two months during today’s trading session. Across the curve, yields/swap rates were 1-5bps higher in a bear steepening pattern, which saw the spread between 2- and 10-year UST yields widen to more than 30bps (widest in the past month). Major equity indices finished mixed on the day, with the DJIA (-0.3%) and S&P 500 (-0.1%) finishing lower with heightened trade concerns, while the tech-heavy Nasdaq was buoyed by shares of Apple, which rose almost 6% on the day after the company posted robust quarterly earnings. In commodities, WTI crude oil futures settled 1.6% lower to $67.65/barrel after the Energy Information Administration reported a surprise 3.8 million barrel build in stockpiles last week. US-China Trade Relations Back in the Fire Yesterday’s positive tone from trade representatives from the US and China proved to be short-lived after news broke this morning that the White House would be more than doubling future tariffs against China. The original 10% tariff on $200 billion worth of Chinese imports is now expected to increase to 25%. The imposed duties will continue to target consumer goods such as computers, handbags, and furniture, while also including oil products. In the ping pong tariff battle, the US levied tariffs on $34 billion worth of Chinese imports on July 5th, after which China retaliated with import duties of equal value. The same process is expected for another round of $16 billion worth of imports over the next couple months. Today’s announcement ups the ante significantly, with the US banking that its strengthening economy will be able to outlast that of China if a trade war were to continue to escalate. A report from the Institute of Supply Management (ISM) gave the sense that the aforementioned trade war concerns may be beginning to take a toll on the manufacturing sector. The ISM’s index of factory activity failed to meet expectations during July with a reading of 58.1 (59.4 est). While the figure was well above the 50.0 index level associated with expansion in the manufacturing sector, the report directly referenced that manufacturers were “overwhelmingly concerned about how tariff-related activity, including reciprocal tariffs, will continue to affect their business.”
