While geopolitical risks linger, including uncertainties regarding U.S.-China trade talks, U.S. relations with North Korea and sanctions on Iran, what seems to be clear for market practitioners is that the U.S. economy is expanding and is on an upswing.
Ten-year Treasury yields hit a seven-year high last week, topping 3.125% as two-year yields also hit a multi-year high at 2.593%, a level not seen since August 2008. Upbeat retail sales data coupled with a rise in industrial production for April pressured interest rates upwards as further evidence that economic growth is continuing to rise. U.S. Treasuries are now yielding more than debt from other nations within the G-10 for the first time in nearly twenty years.
Oil also reached a multi-year high, 3.5 years to be exact, as brent crude prices rose above $80, on the back of the Trump Administration’s sanctions on Iran. Oil prices have risen nearly 20% since the start of 2018. Higher oil prices could foreshadow higher inflation, which would increase the likelihood of the Federal Reserve hiking at a slightly faster pace. The FOMC will release minutes from last month’s meeting later this week, the market will look for any comments regarding inflation and how that may influence hikes going forward.
Sino-U.S. trade talks continued throughout the week, while there was no firm conclusion at the time of this writing, there seemed to be some indications that relations between both parties were warming up. For example, on Friday China ended an anti-dumping investigation focused on U.S. imports on sorghum. It was also reported that the Chinese are trying to cut the trade deficit with the U.S. by about $200 billion. Treasury Secretary Steven Mnuchin stated on Sunday that the Trump administration would delay implementing tariffs on Chinese goods and “put the [potential] trade war on hold.” However, a conflicting statement was released from U.S. trade representative Robert Lighthizer who said Washington may still resort to tariffs.
The Euro declined versus the USD on the back uncertainty regarding Italy’s Five Star Movement-League coalition’s platform. The coalition is focused on reviewing the EU’s fiscal rules, lowering tax rates and ending Russia sanctions. The plan also calls for issuing more short-term government debt. How the coalition intends to reduce debt through faster growth and more spending remains to be seen. USD/EUR was trading at about 1.178 at the time of this writing, about 1.4% down on the week and nearly down 6% from this year’s high of 1.25077. Mixed data out of the eurozone also contributed the EUR edging lower. Current account data narrowed less-than-expected as the trade balance surplus surprised higher-than-expected. Tepid inflation remains a focus for the Eurozone, although higher oil prices should serve as a boon to inflation.
Coming up this week:
Close attention will be paid to the release of the FOMC minutes on Wednesday and Fed Chair Jerome Powell’s speech on Friday. Given the recent robust domestic economic data, market practitioners will focus on any comments regarding inflation and/or the the pace at which the committee may hike rates. Lastly, the market will keep an eye out for any developments regarding trade U.S.-Chinese trade talks.
Key U.S. data includes: Chicago Fed National Activity Index (Monday), Redbook index (Tuesday), PMI (Wednesday), New Home Sales, FOMC minutes, weekly jobless claims (Thursday), housing price index, existing home sales, durable goods (Friday) and Michigan consumer sentiment.
A slew of Fed officials scheduled to speak including: Raphael Bostic (Monday), Patrick Harker, Neel Kashkari, Kashkari (Wednesday), William Dudley (Thursday), Harker, Jerome Powell (Friday), Bostic, Charles Evans, Robert Kaplan.
Overseas data includes: NZD retail sales (Monday), JPY trade data, JPY industrial activity index (Tuesday), GBP public sector net borrowing, German GDP (Wednesday), German PMI, French PMI, Eurozone PMI, GBP retail price index, GBP PPI, GBP CPI, NZD trade data, German consumer confidence survey (Thursday), French business climate, GBP retail sales, GBP inflation report, Eurozone ECB monetary policy meeting accounts, JPY CPI, Swiss industrial production (Friday), German business climate and GBP GDP.
