The a.m. Note is a daily 

review of emerging news

and data impacting the 

economy and financial


Chris Ahrens is the Chief

Market Strategist at First

Empire Securities and is

a member of its Financial

Strategies Group. 

A veteran of the financial
industry, he is an authority
on interest rates and
the economy.

a.m. Note Archive

January 2019

December 2018

November 2018

Predictable Postponement Propels Risk Assets Higher


February 25, 2019 – There was not much doubt that President Trump was going to postpone the imposition of further tariffs on China, especially given indications of progress in the ongoing negotiations. December’s rout in risk assets also left a strong impression on the U.S. administration (and Fed), and the last two months have been all about messaging and massaging markets into a more stable mindset.


The result of these machinations has been to drive volatility across asset classes towards cyclical lows. Whether this is a constructive outcome will be determined by the degree and type of embedded positions investors choose to embrace, the quality of risk management, and the outcome of data and events. Prior experience suggests that price action will move to the pain points at some time in the future.


This week should be busier than last, with many back from vacation and a full calendar of events. Fed Chairman Powell is on the schedule for Tuesday to deliver his Semi Annual Monetary Policy report. Note that he is tasked in this venue to present the views of the FOMC as a whole. On Wednesday, U.S. Trade Representative Lighthizer will testify to the House on the progress of trade negotiations. On the economic front, Housing Starts and Permits are due out on Tuesday. The Advance report on GDP for 2018Q4 will be released on Thursday, with Street forecasts centering around 2.25%. 


Treasury will auction around $300 billion of supply during the week, led by $40 billion of 2-year notes today at 11:30 a.m. EST, $41 billion of 5-year notes today at 1 p.m. EST, and $32 billion of 7-year notes tomorrow at 1 p.m. EST.


Yields have edged lower since yesterday’s close, but remain within the context of recent days’ trading levels. UST 2-year notes are 2.508%, UST 10-year notes are 2.679%, and the 2Y10Y spread is 17.1 bps.


For Now, It’s an “Alfred E. Neuman” Market


February 22, 2019 – The Fed’s decision to shift towards a more neutral stance several weeks ago put a corrective bid into the market for risk assets and sent fixed income down the pathway of a “trade the range, sell volatility” mentality. Along the way, there have been spasms of movement driven by headlines generated out of self-serving leaks about the trade negotiations, intended to influence the direction of the private discussions. The Administration has played the game well, with a substantial assist from the Fed, and financial markets have moved into a state of abnormal stability. Volatility across stocks, bonds, and currencies is as low as it generally gets.


For those managing investments, the question is what will be the next catalyst to price action, and once it emerges, what direction will asset prices break?


There are many obvious candidates that could act as a stimulant to price action. China-U.S. trade negotiations, E.U.-U.S. trade negotiations, Brexit, the “Mueller Report”, global recession, a blow-up in the lower tier of investment grade credit…and then there are Donald Rumsfeld’s “unknown unknowns”. 


From this vantage point, the advice remains the same—It’s time to play late cycle with the investment strategy. Invest in higher quality assets, move out the yield curve, stick to larger issue sizes, and emphasize structure. Do not short volatility; i.e., stay away from callable product (discounted callables being the exception). It makes sense to work on rebuilding the investment portfolio as a reservoir of liquidity in the event economic activity does turn south and loan demand dries up.


Yields have edged lower since yesterday’s close, but remain within the context of recent days’ trading levels. UST 2-year notes are 2.508%, UST 10-year notes are 2.663%, and the 2Y10Y spread is 15.5 bps.

 “If Something Can’t Go On Forever, It Will Stop,” ~ Herb Stein


February 21, 2019 – Measures of volatility are approaching low enough levels that it is time to start preparing for a move in the markets. The equity and U.S. Treasury markets appear to be “trend ready” and awaiting a catalyst. Treasury volatility has declined to near record lows as rates have consolidated in an ever narrower range. While equity prices have moved higher since the beginning of the year, short-term volatility has been declining relative to longer-term volatility and has approached levels that are normally associated with an uptick in activity.


The transition to a higher volatility environment may have to wait until next week, when financial industry professionals return from holiday break. Old timers will remember when the Fed Chairman’s Semi-Annual Monetary Policy testimony was one of the busiest days of the year, so perhaps Chairman Powell’s appearance before the Senate on Tuesday will provide the impetus for some activity.


Reuters is reporting this morning that U.S. and Chinese negotiators are busy formulating various “Memorandums of Understanding” on the issues that the Administration wants addressed. It’s unlikely that a final deal will be inked by March 1, which means that the implementation of additional tariffs will likely be delayed. The scheduling of a Trump-Xi summit will probably be the indicator that negotiations are nearing a conclusion.


Economic data released in the last few hours included PMI figures for Japan and Germany (manufacturing softer), South Korean Exports (negative YoY change), and inflation data for Germany, France, and Brazil (the former two below ECB’s 2.0% target, the latter softer than forecast). U.S. Initial Claims were 216k, down by 23k from the prior week. The 4-week average though was up 4k to 235.75k. New Orders for Durable Goods were up 1.2% (1.7%e), generally as expected after revisions (1.0% from 0.7%p), but Nondefense Ex-Aircraft came in light at -0.7% (0.2%e) with the back month revised down 0.4% to -1.0%.


Treasury will auction $8.0 billion 30-year TIPS today at 1 p.m. EST.


Yields have edged higher since yesterday’s close, but remain within the context of recent days’ trading levels. UST 2-year notes are 2.524%, UST 10-year notes are 2.684%, and the 2Y10Y spread is 16.0 bps.

Markets Idle in Advance of FOMC Minutes


February 20, 2019 – Markets are quiet as the trading day gets underway. The focus for participants will be the release of the FOMC minutes for the January 30 meeting scheduled for 2 p.m. EST. The expectation is that the minutes will offer general insight into the Fed’s thought process on policy, what specific catalysts are motivating their decisions, and what their plans are for managing the unwind of the balance sheet.


As far as the ongoing trade imbroglio is concerned, U.S. and Chinese negotiators are expected to release a Memorandum of Understanding at the end of this week, laying out the actions that will be taken to address the trade deficit, protection of intellectual property, and possible reforms to the state/private partnerships that are a characteristic of China’s economy. The latter issue is complex and likely irresolvable. The U.S. has also apparently raised the issue of Yuan stability with the aim of trying to prevent China from manipulating the currency to mute the impact of tariffs. Efforts to maintain stability would also be a form of currency manipulation, something the U.S. has previously sought to diminish. It’s another complicating factor that will resist an easy solution. Once these talks are finished, more focus will be directed towards trade negotiations with Europe.


The ongoing uncertainty associated with these situations continues to weigh business planning and economic activity.


Exports from Japan were reported at -8.4% in January (-5.7%e, -3.9%p), continuing an ongoing slowdown in trade. The New York Fed also released a report on student loan delinquencies for Q4. Delinquencies rose to a record $166 billion. The Fed noted that this measure is “likely to understate effective delinquency rates” by about half, which would put the stock of unpaid loans at around $330 billion, (Bloomberg). 


Treasury will auction $18 billion of 2-year floating rate notes today at 11:30 a.m. EST. The issue is a reopening. UST 2-year notes are 2.487%, UST 10-year notes are 2.643%, and the 2Y10Y spread is 15.6 bps.

Bond Investors Remain Skeptical as Treasuries Hold Bid


February 19, 2019 – The holiday shortened week is getting off to a bit of profit taking in risk assets as the week gets underway.


There has been new information regarding U.S.-China talks, so the positive sentiment kindled by President Xi at the end of last week continues to hold sway. Regarding the U.S.-Europe negotiations, President Trump received a report yesterday from the Commerce Department on the national security implications of the auto and auto parts trade. He now has 90 days (May 19, 2019) to decide what actions to take against European auto manufacturers based on information in the report. U.S. auto manufacturers have initiated an aggressive lobbying effort against levying tariffs, which could cost thousands of U.S. jobs and add significantly to the price of domestically manufactured vehicles.


In other news, Walmart, the nation’s largest retailer, announced strong earnings for the fourth quarter, with same-store sales up 4.2% and eCommerce transactions 43% higher. These results run contrary to the weak Retail Sales report released late last week for December. If both are correct, it could suggest that the Walmart shopper was unaffected by the swoon in equities, while the more affluent shopper—an owner of shares—opted to curtail activity in the face of the deep markdown in personal net worth.


The economic news released overnight included lower than expected prices on South Korean exports and imports, weakness in Italian Industrial Sales and Orders, a softer ZEW survey of Current Conditions in Germany, and “in line” Employment data for the U.K.

This week’s Treasury supply is limited to T bills.


UST 2-year notes are 2.493%, UST 10-year notes are 2.643%, and the 2Y10Y spread is 15.0 bps.

President Xi Offers Some Encouragement


February 15, 2019 – President Xi of China offered some constructive words regarding the progress of trade negotiations between the U.S. and China, telling the Chinese news agency Xinhua that “negotiations between both sides have achieved important progress in another step,” according to Bloomberg. Talks are scheduled to continue in Washington next week. One of the major sticking points apparently is the U.S. demand that China reform the way in which the government interacts with the domestic private sector. Given the nature of the regime and degree of involvement by the party in China’s economic enterprises, success on this issue will be difficult to achieve.


In other geopolitical news, Spain’s Prime Minister Sanchez, head of a coalition government, has been forced to call early elections (April 28). He was unable to gain the support of the Catalonian faction in parliament to secure passage of a budget. The battle in this instance was not over funding for a wall, but rather a variety of issues related to the ongoing effort by Catalonia to achieve a greater degree of independence from the central government. In addition to Brexit and the populist movement in Italy, this is another issue that undermines the stability of the E.U.


Economic data released over the past few hours showed that China continues to face disinflationary pressures, weak new car registrations in the E.U. highlight a softness in the consumer sector, and better than expected retail sales data in the U.K. was attributed to cost cutting by retailers. 


U.S. economic data out this a.m. consisted of the Empire State Manufacturing Survey, which printed at 8.8 compared to a forecast of 7.0% and a 12-month average level of 17.8. Import Prices were -0.5% (0.2%e) and stand -1.7% lower YoY. Export Prices fell by -0.6%(-0.1%e), -0.2% softer. The disinflationary trend in these measures is the result of current trade policies. Industrial Production was also lower than forecast, falling by -0.6% in January (0.1%e) and Capacity Utilization also fell short at 78.2% (78.7%e).


UST 2-year notes are 2.51%, UST 10-year notes are 2.675%, and the 2Y10Y spread is 16.5 bps.



December’s Equity Collapse Put a Damper on Holiday Sales


February 14, 2019 – Up until 8:30 a.m. EST, the biggest news out since yesterday’s close was the story that President Trump is considering a 60-day extension (to May Day) to the deadline set for finalizing a trade agreement with China. That still seems optimistic and, anyway, highlights the arbitrary nature of the process.

For those who are keeping score, the renegotiated NAFTA agreement, now styled as USMCA, was signed by all parties but has yet to be ratified and put into effect. The administration will craft its comments on the progress of these negotiations with a close eye on how the stock market trades.


Retail Sales data, out at 8:30 a.m. EST, posted a sharp decline to the downside, pushing the trade topic off the top of the market’s list of concerns. Overall, Retail Sales declined by -1.2% vs an expectation for a gain of 0.1%. Ex Autos and Gas, the measure dropped by -1.4% vs a 0.4% forecast. The Control Group, which feeds into GDP, was off by -1.7% vs 0.4%e. 


While some weakness in this number is likely attributable to the government shutdown, which started on December 22nd, it’s more likely that the extreme market volatility that got extensive media play had a more negative impact on consumer behavior than was commonly appreciated. Recall that the equity market bottomed around Christmas Eve after falling from 2800 on December 3rd to 2351 on December 24th (-450 points appx). Many more people would be impacted by this plunge in equity values and the time frame of the cascade overlapped with the holiday selling season.


Not to be ignored, the Initial Claims for Unemployment Insurance rose to 239k from 235k(p). The 4-week moving average is now 231.75k, up 6.75k in the week and 25.75k higher than its secular low of 206k on 9/14/2018.


UST 2-year notes are 2.487%, UST 10-year notes are 2.646%, and the 2Y10Y spread is 15.9 bps.



No Solution Yet, Today the Spin is Positive


February 12, 2019 – Equity markets are trading higher this morning on news that Congressional negotiators have come to agreement on a deal to provide a degree of funding for the border wall and avoid a government shutdown. What remains unclear is whether the president, when presented with this deal, will sign it. It wouldn’t be a surprise if last minute snags arise that will generate some media and score some points with the base.


Trade negotiations continue and the audio and visuals today are positive, giving stocks “happy feet.” Treasury Secretary Mnuchin and U.S. Trade Representative Lighthizer arrived in Beijing today, with talks scheduled for Thursday and Friday with Vice Premier Liu He. Mnuchin told reporters that “We’re looking forward to several important days of talks,” while Lighthizer declined to answer questions ( These are the main actors in this debate, so it is a constructive sign that they are engaged in discussions.


In other news, the BoJ cut purchases of 10 to 25 year bonds in today’s market operation, ostensibly in response to an undesired move to lower yields. This tapering of purchases seems to be a technical adjustment to policy rather than a major shift. The National Federation of Independent Business released its Small Business Optimism index this a.m. It fell to 101.2 (103.0e) from 104.4(p), and continuing a steady descent from the all-time high of 108.8 in August. Fed Chairman Powell will speak today in Mississippi. The topic is rural poverty. 


UST 2-year notes are 2.496%, UST 10-year notes are 2.672%, and the 2Y10Y spread is 17.6 bps.



Risk Rally Hits the Wall


February 8, 2019 – The rally in risk assets is stalling around a key technical level. Capital looking to take advantage of a bounce after the year-end washout has had a good ride. As the indices probe key technical levels, investors have to consider whether to take profits on current positions or put more money to work in the face of still unresolved macro issues.


In addition to the possibility of another U.S. government shutdown, other situations continue to percolate with no resolution in sight. Signs of concrete progress towards a trade agreement with China have yet to emerge. At best, periodic statements suggesting positive engagement are filtered out from official sources whenever the stock market seems rattled. Trade negotiations with Europe are non-existent. No solution to the Rubik’s Cube of Brexit has yet emerged. Earnings season, by all accounts, has gone well, but both the NYT and WSJ published articles this week citing a moderation in forward guidance. Central bankers, official institutions, and a wide variety of private think tanks have all issued forecasts of a downshift in economic growth.


High-quality, liquid, fixed income assets have benefited in this environment. Interestingly, yields have continued to hold their bid, even while equities moved higher in the past few weeks. There were moments of churn with a drift higher, but the correction of the move off of November’s high in yields has certainly occurred more in “time” than in prices. This type of response suggests a solid, persistent underlying bid for fixed income.


3-month Libor set at 2.69775%, +0.075 bps, so the big move may have been a one-day wonder.


UST 2-year notes are 2.467%, UST 10-year notes are 2.638%, and the 2Y10Y spread is 17.1 bps.

Growth Concerns Fuel Bid for Bonds


February 7, 2019 – Sovereign benchmark rates across a wide sampling of global markets are trading at near one-year lows as today gets underway. The main catalysts for the ongoing bid have been a fear of slowing growth due to increased geopolitical tensions (e.g. trade frictions/Brexit), an excess of leverage that has acted as a brake on growth, and poor demographic profiles across many of the major economies. These concerns have been informed by an ongoing cascade of downwardly revised forecasts (today from the E.U. and Bank of England), business management that has adopted a more defensive posture in response to those forecasts, and now softer data, which completes the negative loop.


Overnight, the Reserve Bank of India delivered a surprise cut in the policy rate. This move was seen as a reversal, which policy makers justified due to an easing of inflation. The Bank of England left rates unchanged, as expected. Governor Mark Carney, cited the “fog of Brexit” as creating tensions in the economy which are impacting housing and consumer confidence, (Bloomberg).


Asia remains closed, so there was little news from that region other than New Zealand’s Unemployment Rate which rose 0.2% to 4.3% (4.1%e). German Industrial Production fell on a YoY basis by -3.9%, a bit more than the -3.4% forecast by economists.


For those who follow Libor, the benchmark set this a.m. at 2.697%, 4 bps lower than yesterday. This is noteworthy, given it’s the largest one-day move lower in over a decade (Bloomberg). Sources on the Street suggest that this may be “a delayed reaction to the general drop in funding levels across the board.”


The Treasury will auction $19 billion of 30-year notes today at 1 p.m. EST.


UST 2-year notes are 2.496%, UST 10-year notes are 2.664%, and the 2Y10Y spread is 16.8 bps.

That Was Fun, Now What?


February 6, 2019 – The State of the Union speech did nothing to shift the narrative on any of the issues the markets care about and therefore provided little information to help investors handicap the probability of outcomes. For viewing pleasure, it was a close tie with Sunday’s Super Bowl.


Information in the corners of different markets and data releases continues to engender concerns about where the domestic and global economy is headed. Freight metrics such as the Baltic Dry Index and New Orders for Class 8 trucks (semis) are pointed south. German industrial output continues to soften. Asian export data is in a negative trajectory. Italian bank stocks are trading poorly, but the media focus is on German institutions. Reserve Bank of Australia Governor Lowe, while not moving totally into the ECB’s corner, now sees policy probabilities as “more evenly balanced” with the possibility that “the economy is softer than we expect.”


For now, investors in risk markets have chosen to downplay the negatives and put cash to work in areas that bore the brunt of the fourth quarter sell-off. Technically, the price action still looks corrective.


Treasuries, however, have basically held the gains accrued during that period and are content to tread water, awaiting the resolution of the geopolitical issues that are slated to come to a head in a few short months.


The Treasury will auction $27 billion of 10 year notes today at 1:00.


UST 2 year notes are 2.506%, UST 10 year notes are 2.679%, and the 2Y10Y spread is 17.3 bps.

News Cycle Provides Thin Gruel


February 5, 2019 – There was no news out overnight concerning any of the major issues the markets would like to see resolved. Over the next 24 hours, the most important event will be the State of the Union address, which President Trump is scheduled to deliver to a joint session of Congress tonight at 9:00 p.m. EST.


The main concern for investors regarding this speech will be whether the negotiations over border security will lead to another government shutdown. The rational person would believe that neither side benefits from such an outcome and therefore it won’t happen.


Equity markets have moved higher in recent days and look set to continue their advance today. Overnight, solid earnings reports helped to fuel the buying. A lack of volatility in the bond markets has also encouraged money to flow towards risk assets. Oil prices seem to have stabilized for now, as has the rest of the commodity complex, as traders await the outcome of the U.S.-China trade negotiations. Currency markets are also steady.


Treasury will auction $38 billion of 3-year notes today at 1 p.m. EST.


Expect a quiet, range-bound day today. UST 2-year notes are 2.534%, UST 10-year notes are 2.718%, and the 2Y10Y spread is 18.4 bps

Welcome to the Year of the Pig!


February 4, 2019 – Global markets are quiet as the week gets underway. Mainland Chinese markets will be closed all week for the lunar new year holiday. The Year of the Dog is over (though the Super Bowl advertisements might have had you thinking otherwise) and the Year of the Pig is beginning. Pigs symbolize wealth in China. They are associated with good fortune, are realistic, decisive, and pragmatic. Their easy going nature, lack of suspicion, and discrimination, however, makes them gullible and susceptible to being scammed, ( Sounds like a normal year in the markets!


The headlines in the a.m. press read a bit negatively for risk assets. The WSJ is running a couple that highlight fears over China’s growth prospects and a cautionary stance being adopted by U.S. small businesses. The NYT is noting tech concerns. Bloomberg is waving the flag on Italian debt issues.


With the equity market having reached an important technical resistance level (2713 = 61.8% of 2940 -> 2347), it may well be time to take a breather. January got off to a great start, partly due to fast money taking advantage of an oversold condition and February may usher in a period of re-assessment. Over the course of this week, approximately 100 S&P 500 companies will release their earnings reports, giving market participants plenty of information to digest.


Many of the major geopolitical issues have yet to resolve themselves, so investors will likely exercise caution in deploying capital over the next few weeks. Brexit issues will have to reach some sort of resolution (or a deadline extension) with the March 29 cut-off date approaching. U.S. – China trade issues also have to produce a tangible, fully-delineated agreement, or also face an extension of the March 1 deadline. In Europe, the banking system remains under strain, with German and Italian banks specifically in the market’s focus (the Euro bank index has rolled over).


There should be plenty of economic data this week, as the U.S. government catches up with the statistical calendar after the January shutdown. In addition, Treasury is conducting its quarterly refunding, auctioning $38 billion 3 year notes (Tuesday), $27 billion 10 year notes (Wednesday), and $19 billion 30 year bonds.


Rates are a touch higher in advance of the auctions. UST 2 year notes are 2.52%, UST 10 year notes are 2.711%, and the 2Y10Y spread is 19.1 bps

Still the Cleanest Dirty Shirt


February 1, 2019 – Today’s Nonfarm Payrolls report continues to paint a picture of a healthy U.S. labor market. Payrolls increased by 304k, but last month’s data was revised downward by 90k. The trend in payroll growth, as measured by the 3-month average (241k) and 12-month average (234k) remains solid and the economy added 2.7m workers in the prior 12 months. The Unemployment Rate ticked up to 4.0% (3.9%). Average Hourly Earnings showed a gain of 3.2% after 3.3% in the prior month. The length of the workweek was unchanged at 34.5 hours.


Monthly PMI data for the manufacturing sector was released overnight for a number of countries. In aggregate, the information suggests a deceleration in manufacturing, likely due to uncertainties over trade (see table and comments below).


Eurozone inflation data for January at 1.4% CPI and 1.1% Core. With inflation running below the ECB target of 2.0% and the growth environment moderating, the odds of any removal of policy accommodation seem small at this point.


Treasury international capital flow data was released yesterday. Foreign investors held $6.2t of Treasuries as of the end of November, approximately 40% of outstanding marketable debt. Aggregate holdings are down $102.1b (-1.6%) from a year ago. China currently holds $1.12t in Treasury obligations, about $55 billion fewer than a year ago. They apparently will redirect these dollars towards U.S. soybeans and other goods, having announced their intentions to “substantially” increase purchases of U.S. products in coming months, (Bloomberg).


On the geopolitical front, the only new news concerns relations between the U.S. and Russia. President Trump has announced his intentions to withdraw from a treaty that restricted use of intermediate range nuclear weapons. Noncompliance by the Russians has been cited as the reason for the decision. U.S.-China trade negotiations continue, as does the wrangling over Brexit.


The bias from here remains neutral to positive towards rates, with the expectation that the near term range will trade within narrow bounds. Rates are little changed from yesterday at this time, with the 2-year note at 2.482%, 10-years are 2.647%, and the 2Y10Y is 16.5 bps. 

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