Yields Trend Lower Despite Trade Optimism

 

All Hope is Not Lost

Today President Trump expressed optimism at the prospect of a trade resolution with China as he commented on the most recent trade offer sent by the Chinese government earlier this week.  “It’s a pretty complete list, a lot of the things we asked for, but there are four or five things left off,” said Trump, “we’ll probably get them, too. But as you know it’s a very complete list.”   The document from China included 142 items, broken into three categories – 1) issues to be negotiated further 2) negotiations already in the works and 3) areas that are off limits.  Advisers in the White House currently remain divided on the level of accommodation to provide China in negotiations, with some taking a hard line and others simply wanting to avoid any further escalation between the world’s two largest economies.

 

 

The pro-trade news helped the S&P 500 (+0.22%) and Dow Jones Industrial Average (+0.49%) grind higher on the day, while the tech-heavy Nasdaq was dragged lower (-0.15%) by the communications and technology sectors. Facebook traded down 3% after Congress increased its scrutiny of the social media giant’s business practices. That news may spell trouble for US equity markets as a whole, given the prominence of large technology firms in the stock market indices.  In energy markets, WTI futures finished unchanged on the day at $56.46/barrel, ending its rough week which saw prices drop 6.2%.

 

 

Yields Continue Lower

US Treasurys rallied in the final trading session of the week as bond markets have continued to react to the uncertainties surrounding international growth.  In an interview with CNBC earlier today, Fed vice chair Richard Clarida noted such risk in stating that “there is some evidence of global slowing, that’s something that is going to be relevant as I think about the outlook for the U.S. economy, because it impacts big parts of the economy through trade and through capital markets and the like.”  Clarida also commented on his expectations for the long run “neutral” rate, placing the range between 2.5% and 3.5%, which ultimately translates to anywhere from two to six more quarter-point hikes by the Fed.  Echoing the recent guidance of a number of Fed representatives, he asserted that “We are at a point now where we really need to be especially data dependent.”  Government yields/swap rates finished 4-6bps lower across the curve, pushing the 10-year note yield to 3.065% — more than 12bps lower than its level at the beginning of the week.  Additionally, the probability of a December rate hike slid slightly to 68%.