Trade Tensions Ease, Middle East Tensions Rise

 

US-China Trade Concerns Ease

Over the weekend, President Trump took a more conciliatory tone with China as he publicly supported Chinese firm ZTE Corp, a company being severely impacted by the tariff battles.  In a tweet on Sunday, Trump informed the world (including many of his advisors for the first time) that he was working to find a way for ZTE to “get back into business, fast. Too many jobs in China lost.”  The news broke ahead of Chinese Vice Premier Liu He’s scheduled visit to the US tomorrow, where he and Treasury Security Steven Mnuchin will be tasked with making progress to alleviate the tit-for-tat tariff uncertainty that has escalated over the past few months.  

 

Financial markets welcomed the US/China trade-friendly news as US stocks finished with gains on the day, albeit off session highs.  The DJIA posted an eighth consecutive daily increase (+0.3%), while the NASDAQ and S&P 500 inched 0.1% higher.  US Treasurys sold off from the beginning of the session, with yields/swap rates climbing 1-4bps across the curve in a bear steepening pattern.  The 10-year note yield increased more than 3bps to cross the 3.00% psychologically-significant level for the third time in the past month.  The US Dollar was generally flat on the day against both the Euro (EUR) and the Pound (GBP), up 0.1% vs EUR and down 0.1% vs GBP respectively.  Oil was up on the day as WTI Crude Oil Futures gained 0.6%, closing at $71.10/barrel on fears that increased tensions in the Middle East will impact supply.

 

Fed Sticks to Gradual Increases

This week financial markets will be presented with speeches from a number of Fed officials.  Such commentary began with Cleveland Fed President Loretta Mester (FOMC voter), who spoke earlier this morning at a central bankers event in Paris, France.  Overall, Mester conveyed a positive tone about the US economic outlook, citing her expectations for “above-trend output growth, continued strength in labor markets, and firming inflation”, and further backing the Fed’s gradual approach to raising interest rates.  The gradual path of rate hikes (as opposed to a steep path) is largely influenced by the Fed’s intention to “give inflation time to move back to goal”, Mester argued while remarking that inflation could move above the long term goal of 2%.  Fed Fund futures currently imply a 41% probability of three more rate hikes in 2018 (4 total for the year).