US Treasurys Resume Rally as Weak Data Hinders Economic Growth Outlook

Investor sentiment from Friday spilled into the start of this week, as Treasury prices continue to rise, with yields/swap rates declining 1-5 bps across the curve in a bull flattening pattern.  This morning, soft manufacturing data added to last week’s weaker-than-anticipated consumer price and retail sales data, restarting a flight to safety in US financial markets as the yield on the 10-year note fell an additional 3 basis points to 2.30%.  The Federal Reserve Bank of New York reported a decline in its Empire State Manufacturing Index, falling from a two-year high of 19.8 in June to 9.8 in July, as a drop in new orders and shipments weighed on manufacturing activity.  US stock markets hovered near flat throughout most of the day, with all three major US equity indices remaining near record highs.  In the financial sector this week, investors will be able to parse through the earnings reports from three more large banks — Goldman Sachs Inc., Bank of America Corp., and Morgan Stanley, after last week’s quarterly reports released by JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc. generally disappointed.  In the political arena, a Senate vote on the new healthcare bill was delayed for a week as Senator John McCain recovers from eye surgery, providing more time for Republicans to try to garner support for the struggling “Better Care Reconciliation Act”.  Two Republican senators have already voiced their intent to vote against the bill, putting the GOP in a difficult position to attempt to move the reform forward.      

 

Internationally, GDP growth in China during the second quarter was reported at levels stronger than expected, boosted by a robust rebound in industrial output.  As released by the Chinese National Bureau of Statistics, Q2 GDP growth totaled 6.9% compared to a year earlier, slightly beating the forecasted expansion of 6.8%.  A key contributor to the rise included output at Chinese factories which increased 7.6% YoY in June (+6.5% expected).  The surging industrial output figures prompted a bump in the prices of metals, as iron ore, copper and zinc futures all rallied during the trading session.  Looking ahead, the Chinese government has targeted 6.5% growth for full year 2017, with a second half slowdown expected as a result of increased government debt and trouble within the real estate sector.  With property prices in China jumping 16% YoY in the second quarter, there is concern about Chinese consumer demand going forward given high mortgage debt levels.