Equity markets rallied, bond yields fell, and the curve became a bit more inverted last week on hopes the Fed may respond to a cooling of global economic growth and risks of rising trade tensions with rate cuts. Declines in the short end of the curve and the USD are reflecting that higher likelihood of rate cuts, bolstering risk assets and non-U.S. assets respectively.
- Migration centric tariff threats against Mexico were averted late in the week, averting collective negative economic consequences that would most certainly have followed.
- POTUS indicated he will wait until after the G20 meetings later this month to decide whether to escalate the U.S.-Sino trade war by initiating tariffs on an additional $300b of Chinese imports.
- Rising political pressure from within the Republican caucus against escalating trade wars has reduced the likelihood of U.S. implementing the full 25% on additional $300b, for now.
- Mexico is the U.S. second largest (China #1) trading partner. MI, TX, AZ, NB, KS all list Mexico as their largest import or export partner. The political repercussions (for POTUS) of a trade war with Mexico are clear and further support the view that calmer heads would/will prevail.
- The NY Fed estimated tariffs cost the average U.S. household $438 in 2018 and approximately $831 in 2019 with policies enacted thus far. Additional tariffs run the risk of offsetting much of and in some cases more than the taxpayer benefits of the 2017 tax cuts.
- Soft inflation, benign wage growth, slowing job creation, trade risks, and Brexit uncertainty are all making the case for more open conversation of rate cuts as the June FOMC meeting approaches. Markets are pricing in an 20% likelihood of a rate cut next week and 75% by July.
- The Fed Beige Book, used for the upcoming FOMC meeting, cited “moderate” growth, “modest” inflation, “slight to moderate” employment growth, “relatively subdued” wage pressures, “generally positive” manufacturing, and “positive but tempered” consumer spending.
- The May employment report was greeted as a friendly ‘rate cut’ data point for the Fed. Three-month average job creation has fallen to 151,000, notably below the 238,000 level earlier in the year and wage inflation (3.1%) came in at the low end of expectations.
- The 10yr UST yield has finished over 3.5 standard deviations below its 50 dma only 14 times in the past three decades. Four, including last week, have occurred this year.
- The duration (11 days) and depth (19bps) of the current U.S. yield curve inversion is beginning to draw attention.
- Fed balance sheet last week was $3.848t, down $612.8 billion since the unwind began back in October 2017. Balance sheet reduction program is still on schedule to conclude in September.
Economic Release Highlights
- May jobs report of 75,000 new jobs fell short of the consensus range but maintained a headline unemployment rate of 3.6%.
- Monthly wage inflation of 0.2% was the lowest reading since last September. A 3.1% annual rate and 3.7% 3m annual rate are triggering any tangible inflation concerns.
- Consecutive weekly jobless claims streaks of 73 below 250k and 222 below 300k remain intact.
- Broad U-6 unemployment of 7.1% hit its lowest level since the year 2000.
- May ISM Non-Manufacturing reading of 56.9 topped the consensus range and is at its highest point since February. Employment, new orders, and business activity were all very strong. Sixteen of seventeen industries reported expansionary readings.
- May ISM Manufacturing of 52.1 came in below the consensus range and is now at its lowest level since October 2016. Six of eighteen sectors are in contraction with tariffs cited as the most common concern.
- May PMI Manufacturing index of 50.5 is now at a 10-year low and in line with overall softening global PMI trends.
- Eurozone auto sales were up 1.8% MoM and up double digits annualized for the three months ending May.
- Consumer credit creation (U.S.) of $17.5b far exceeded expectations of $13b.
- QoQ Eurozone GDP registered 1.6% despite some tangible headwinds from inventory burn.