Daily Market Color

US-China Trade Outlook Drives Rates Higher Despite Weak Economic Data


Treasurys Extend Selloff
US Treasury yields/swap rates climbed for the second consecutive day, as optimism over US-China trade talks outweighed a barrage of downbeat economic data. With one week remaining before tariffs on Chinese imports are set to increase from 10% to 25%, high-level progress in trade negotiations was reported, with multiple memorandums of understanding being constructed between the two sides. This round of talks is set to wrap up tomorrow, and markets will be closely monitoring to see if enough progress has been made to convince President Trump to postpone the planned tariff hike. Yields/swap rates rose 2-6 bps across the curve in a bear-steepening pattern, lifting the 10-year note yield to 2.69%.



Global Economic Data Disappoints
Today financial markets received a flurry of key economic data releases that fell short of expectations, beginning with weak manufacturing readings out of Germany and Japan. Germany’s manufacturing PMI recorded its steepest decline in the past six years, while Japan’s manufacturing sector reported a contraction for the first time since 2016. The story wasn’t much different in the US, where the Markit US Manufacturing PMI slipped to 53.7, missing median forecasts of a 54.8 and providing further evidence that the escalating global trade war is taking a toll on U.S. manufacturing.



Other US data on the day included the sales of previously owned homes, which fell to the lowest level since November 2015. During January, existing home sales totaled a seasonally adjusted rate of 4.94 million (-1.2%) vs. expectations of 5.02 million (+0.2%). Compared to a year earlier, sales were down 8.5%. Separately, initial jobless claims provided the lone bright spot within the releases, as the number of Americans claiming unemployment benefits totaled 216k for the week ended February 16th, 23k lower than the prior week. The four-week moving average however, increased 4k to 235,750 – the highest in the past year.



Equity markets declined in response to the weak data, as all three major US indices posted losses of nearly 0.40%. In energy markets, WTI crude oil futures retraced a portion of yesterday’s gain, sliding 0.4% to just under $57/barrel. Leading oil prices lower, the Energy Information Administration reported today that the US crude stockpiles had risen to their highest levels in more than a year, increasing by 3.7 million barrels last week.


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