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.

    Back to a.m. Note

Range Bound for Now


January 29, 2019 – Treasuries continue to churn in a well-defined range, while the post-New Year’s bounce in equities looks increasingly corrective. The conventional wisdom is that the dollar will weaken over time, while commodities will be driven by perceptions of global growth.


The U.K. Parliament will vote on the latest iteration of the Brexit process today at around 2 p.m. ET. The vote will move discussions along to the next stage of a complicated process. The highest probability remains an extension to the March 29th deadline as politicians cast about for a solution.


The U.S. and China begin trade negotiations tomorrow in Washington, D.C. The Justice Department laid out its case against Huawei yesterday afternoon, filing criminal charges alleging bank fraud, technology theft, and obstruction of justice (BBC). It’s difficult to imagine that this situation will not play a role in the discussions, particularly since U.S. and Chinese officials have made comments that create a linkage between the issues. It doesn’t create a positive context for the next couple of days’ meetings.


The market is also biding its time as it awaits the FOMC Statement and Chairman Powell’s press conference tomorrow, hoping to glean some insight regarding the Committee’s plans for the balance sheet.


The persistent frictions continue to weigh on prospects for growth. Vietnam released a number of statistics yesterday, revealing a downshift in import and export activity, as well as a slowing of industrial production. While there appears to be a bit of seasonality related to the downshift in activity, the intermediate term trends point lower. Vietnam is a country that is engaged in value-added, light manufacturing activity, so the trends in its economy bear watching.


Treasury’s auctions of 2- and 5- year notes went well yesterday, with both issues pricing through the offering levels in the screens at 1 p.m. ET. Today, the Treasury will follow up with auctions of $20 billion 2-year floating rate notes and $32 billion of 7-year notes.


Treasury yields have been range bound for a good part of the month. By week’s end, the information flow may be sufficient to provide some direction to investors. While the bias from this perspective is that yields will break lower, the direction of the break will dictate the next short to intermediate trend in yields.


Currently the W.I. 2-year note is 2.581%, 10-years are 2.735%, and the 2Y10Y is 15.4 bps. 

Politicians Achieve the Near Impossible


January 28, 2019 – The prospect of a shutdown in air traffic control for longer than 15 minutes was sufficient to quell the lunacy over the government shutdown. Inconveniencing millions of voters while creating immediate economic havoc was not in the interests of either party. Politicians beat a quick retreat, recognizing that the situation was on the verge of spiraling out of control. Their obduracy did, however, succeed in achieving the near impossible, as one comic noted, “It’s quite an accomplishment to make air travel out of LaGuardia any worse than it already is,” (SNL). 


With the government getting back to business, the release of a slew of economic statistics should help to fill in the blanks as investors begin what will be a busy and important week for the markets.


On the geopolitical front, the U.K. will hold another vote on Brexit (Tuesday) as Parliament attempts to maneuver towards a compromise or create a situation that will allow them to buy time by delaying the March 29 deadline activated by Article 50.


Senior U.S. and China trade negotiators will meet in Washington on Wednesday and Thursday and attempt to move the process forward in advance of the early March deadline for making a deal.


Chairman Powell and the FOMC will also meet this week. The post-meeting rate announcement and press conference are scheduled for Wednesday afternoon at 2 p.m. and 2:30 p.m. ET. The focus will be on potential changes to the balance sheet. 


In addition to a plethora of economic releases expected over the course of the week, the Bureau of Labor Statistics will release the employment data for January on Friday morning. Nonfarm Payrolls are forecast to have risen by 165k, with the Unemployment Rate steady at 3.9%, Average Hourly Earnings higher by 3.2%, and the Workweek unchanged at 34.5 hours.


Earnings season is also in full swing, so equities will be highly responsive to results and guidance as the week unfolds. Apple, Amazon, and Microsoft are among the companies reporting this week.


While all these situations are playing out in the headlines, Treasury will be hitting the market with a wave of issuance, offering over $300 billion of bills, notes, and floating rate notes to fund the growing deficit.


Treasury yields have been range bound for a good part of the month. By week’s end, the information flow may be sufficient to provide some direction to investors. From this vantage point, the balance of risks points to lower yields ahead. Currently the W.I. 2-year note is 2.61%, 10-years are 2.751%, and the 2Y10Y is 14.1 bps.

Hope Springs Eternal


January 25, 2019 – With little of substance to draw on today, the markets are embracing hope as the basis for taking risk assets higher in price.


The two bills that were brought to the Senate floor yesterday failed to pass. Out of this failure, “urgent” negotiations have begun with the goal of ending the 36-day shutdown. Nowhere is the sense of urgency felt more keenly, however, than by the federal worker who has now missed two paychecks at a time when holiday bills are filling the mailbox. One can only hope that out of these failures a phoenix will rise from the ashes.


A similar sense of optimism has enveloped the U.S.-China trade negotiations, with growing expectations that an agreement will be reached to the benefit of both parties and economic activity will resume along its former positive trajectory. This naiveté ignores the massive breaches that have splintered the post-WWII geopolitical framework and the post-Cold War development of global supply chains. New frictions, both tangible and intangible, have been created and associated costs will have to be assessed.


As noted, the data flow was light overnight, with the IFO survey of German business conditions the most important. Though the current environment is viewed as stable, respondents have a dimmer opinion of the general business climate and future prospects for the economy. Headlines were littered with references to slower Euro-zone growth prospects, piling on ECB President Draghi’s observation yesterday that “risks to the outlook have moved to the downside,” (Bloomberg).


There are no data reports in the U.S. today due to the government shutdown.


There are no auctions today, but just as a “heads up”, Treasury has a very heavy supply schedule jammed into next week. While the exact size of the bills to be auctioned is TBA (CM, 4W, 8W), if the prior week’s auction sizes are used as a guide, the total could well breach the $300 billion.


Treasury yields remain range bound, with W.I. 2-year notes at 2.58%, 10 years at 2.737%, and the 2Y10Y at 15.7 bps. 

Biding Time


January 24, 2019 – There are a few items of note to be aware of as the U.S. trading day gets started.


The ECB released its policy decision this morning, leaving rates unchanged (as expected) and reiterating that they will continue to reinvest balance sheet run-off for an extended period time and expect to keep rates on hold through the summer. Given the softening in the economic data, the uncertainties surrounding Brexit, and the poor performance of the continent’s banking sector, the odds of any rate hike this year are diminishing as time goes by. ECB President Draghi commented in his opening statement, as he has in several recent speeches, that risks to the outlook have moved to the downside.


The preliminary Markit PMI surveys for January were released this morning. Germany’s Manufacturing PMI report was a disappointing 49.4, compared to a forecast of 51.5. The Manufacturing PMI for all of the Eurozone was weaker at 50.5, versus an expectation for a 51.4 print. The pervasive deceleration in manufacturing activity brings to mind the weakness in Asian export data. All of these sluggish results can be tied back to the ongoing uncertainty surrounding the global trade regime.


All eyes will be turned on Washington today, as the Senate takes up two different proposals designed to move the shutdown negotiation process onto a pathway towards resolution. Trade negotiations will resume next week, when senior teams from China and the U.S. sit down at the bargaining table. In comments this morning, Commerce Secretary Wilbur Ross remarked that the U.S. and China remain “miles and miles” away from a trade resolution (Bloomberg).


Initial Jobless Claims, out at 8:30 a.m. ET, printed at 199k, compared to a 218k estimate. Continuing Claims stand at 1713, -24k from last week’s level. Claims have likely been skewed by weather or the shutdown, as the 199k level looks oddly low. Nevertheless, by all indications, the labor market continues to be robust.


Treasury yields remain range bound, with 2-year notes at 2.558%, 10 years at 2.712%, and the 2Y10Y at 15.4 bps.

Steady as She Goes


January 23, 2019 – The overnight flow of information has been thin, leaving prices to make a bit of a round trip after yesterday’s move.


Late yesterday, risk markets were concerned about a story that low level trade talks between the U.S. and China had been canceled, perhaps a negative foreshadow of the higher level conversations slated for next week. Presumably, this cancelation would have been a sign of China’s displeasure over stories that the U.S. intends to request extradition from Canada of Huawei’s CFO, who is at the center of the company’s alleged violations of sanctions on Iran. Senior U.S. administration figures denied that any meeting had been canceled, somewhat ambiguously stating that none had been formally scheduled.


U.S. equities then shifted direction, presumably due to positive earnings reports after the close, and moved higher, recouping some of yesterday’s lost ground. Treasury prices have likewise given up some of their gains.


Stories that got a bit of attention included China’s announcement that it intends to provide fiscal support to their flagging economy (not new news), a decline in exports from Japan in the latest period, weakness in the U.K. manufacturing outlook due to Brexit concerns, and news that the U.S. Senate will vote on a couple of bills that could provide a pathway out of the current shutdown crisis. Nothing new here, just a rehash of current narratives.


Treasury yields remain range bound, with 2-year notes at 2.597%, 10-year notes at 2.768%, and the 2Y10Y at 17.1 bps. 

Inside and Outside – Frozen


January 22, 2019 – The U.S. government is in its 32nd day of the shutdown with no end in sight. Senate Majority Leader McConnell will be proposing legislation to the upper legislative body this week, with the goal of making a political point rather than providing a solution to the logjam. It’s not yet clear what will provide an impetus to formulate a compromise, but McConnell’s involvement at least signals a broadening out of engagement, even if the sincerity of what is motivating his actions may be dubious.


The headlines across the media are casting a negative tone, despite news that is generally in line with moderating expectations of global growth. China reported YoY slowing in GDP to 6.4% (as expected), with the most recent Industrial Production and Retail Sales numbers beating forecasts (but trending lower). The biggest outlier in the data stream was the plunge in Taiwan’s Export Orders (-10.5% YoY v. -3.6%e). This data point is worthy of some attention, given Taiwan—like South Korea—is an exporter of myriad sophisticated products to different countries.


Brexit wrangling continues. The odds of a second referendum feel like they are rising a bit and, given the apparent intransigence of negotiating parties, a delay in enacting Article 50 also seems likely.


The data calendar for the U.S. is light, given the government shutdown. Fed speakers will be on hiatus given the blackout period in front of the FOMC meeting (1/30 announcement). Treasury supply for the week will be limited to bills. China-U.S. trade negotiations do not start until 1/30. That date is also the deadline for the U.S. to request extradition of Huawei CFO Meng Wanzhou from Canada.


Given this backdrop, focus will be directed to earnings reports and the message they convey about forward prospects for economic activity and the follow-on response by investors in risk assets.


Treasury yields have declined from Friday’s close, with the 2-year currently at 2.585%, 10- year at 2.748%, and the 2Y10Y curve marked at 16.3 bps.  

Managing Images, Avoiding Substance


January 18, 2019 – It’s “Day 28” of the government shutdown, with both sides holding firm to their positions. For now, it’s all about the optics and trying to influence the voters. The President denied a request for military transport to Speaker Pelosi, preventing her from visiting the troops and generating a photo opportunity. He then canceled Secretary Mnuchin and Ross’s trip to Davos, realizing that would create a photo opportunity of a different nature. Golf season officially kicks off with the 2019 Masters, scheduled for April 8-14. That probably sets the outer limit on how long this disagreement will last.


A lead story in the Wall Street Journal suggesting that the White House is debating concessions on tariffs as a means to incentivize China to come to terms on the trade negotiations is providing an upside boost to equities this a.m. The story is being denied, but the market wants to believe that a deal will get done. Also, the Administration’s pattern of messaging is generally disorganized, so traders look like they are going to close the market for the long holiday weekend on a positive note.


News flow on other major issues was thin, with politicians in Britain playing the same game as those in the U.S. One issue to keep on the crowded back burner is Greece, where Prime Minister Tsipras also survived a vote of no confidence this week. There are elections coming as he is nearing the end of his four year term (October 20th at the latest), raising the possibility of potential disruptions to the financial markets in coming months.


Headlines from Fed speakers over the past few hours continue to emphasize the central bank’s “patient” stance, while acknowledging a solid economic backdrop, and leaving the door cracked open to possible tightening. Chicago Fed President Evans (voter), in a conversation with Bloomberg, stated that he wouldn’t be surprised to have a higher funds rate by year end. New York Fed President Williams (voter), seemed a bit more equivocal, saying the Fed needs “prudence, patience, and good judgment.”  Amen.


10-year Treasury yields have poked above the top of the narrow 2.70% - 2.75% range, ceding ground as stocks firm. The 2-year is currently 2.589%, 10 year is 2.766%, and the 2Y10Y is 17.7 bps. 



January 17, 2019 – Markets feel like they have reached a point of stasis and are awaiting a catalyst.


The S&P has retraced roughly 50% of its retreat from the September highs, and 61.8% of its December swoon. Investors holding the belief that the improvement in valuations was sufficient have re-entered the fray, but it feels like a further move higher may require firmer conviction. That degree of confidence is not likely to emerge until the core issues that have bedeviled investors over the past year move closer to resolution.


Those issues include trade negotiations, Brexit, attaining a balance of power in the energy production markets, geopolitical stability, political gridlock, and clarity around the trajectory of monetary policy.


In the case of monetary policy, the failure of the political elites to resolve the former issues is creating sufficient friction in the economic sphere that it is increasingly prevented from continuing along the pathway to normalization. While monetary policy makers are the focus of criticism, it is the failure of politicians and the political process that has created the imbalances and disruptions that have forced central banks to pursue abnormal policies to remediate dislocations.


The Treasury market senses that an inflection point could be approaching. The investor base is reflecting its opinion that the current balance of risks is tilted to the downside. That’s what has kept the bid in the market over the past few weeks.


Overnight there was little news. The U.S. investigation of Huawei is cited as the reason equities are lower. Investigators have apparently gathered evidence that suggests theft of trade secrets may warrant an indictment. This action could poison the well as far as trade negotiations are concerned, so “sell equities” for now.


Treasury yields remain confined to a narrow range. The 2-year is currently 2.541%, 10-year is 2.72%, and the 2Y10Y is 17.9 bps. At 1:00, $13 billion of 10-year TIPS will be auctioned by the Fed. 

Plan B?


“Would you tell me, please, which way I ought to go from here?" "That depends a good deal on where you want to get to." ~ Alice in Wonderland


January 16, 2019 – Prime Minister May’s Brexit proposal failed spectacularly (432 – 202) in Parliament yesterday, giving the Labour Party an opening to call for a vote of no confidence (scheduled for today at 2:00 p.m. EST). The P.M. is expected to survive this test, and the next move will be to reach across party lines to negotiate a proposal that might gain support of the members of Parliament. It’s not clear whether this can be achieved, nor is it at all apparent that the E.U. would be willing to accept changes, but for now the day of reckoning is deferred. The deadline for withdrawing remains March 29, but it’s likely that an extension will be requested to provide time for negotiations.


Risk markets are green as the U.S. trading session begins. Investors seem to be willing to start the new year with an optimistic bias. Valuations have improved, cash needs to be put to work, and there are 12 months ahead to make up any shortfalls.


The news flow overnight was subdued. While there has been no meaningful news regarding the U.S. budget impasse, President Trump has ordered certain workers to get back on the job, despite the fact that paychecks will not be forthcoming until the dispute is resolved. It will be interesting to see how the workforce responds to this gambit. China injected $84 billion in liquidity to offset drawdowns from seasonal tax payments. This follows a recent reduction in the reserve requirement and cuts in tax rates. From the outsider’s point of view, it appears as though the state apparatus is pulling on a lot of levers to make sure the system is liquid and credit continues to flow. Late yesterday, in a presentation to the European Parliament, ECB President Draghi observed that recent economic developments were weaker than expected and that significant stimulus is still required to support growth (Bloomberg).


The yield curve has steepened and Treasuries have moved to the top end of the recent range in response to the rally in equities. The 2-year is currently 2.547%, 10-year is 2.729%, and the 2Y10Y is 18.2 bps. 

The Play’s Not the Thing, It’s the After Party!


January 15, 2019 – Investors will bide their time today, awaiting results of the Parliamentary vote on Brexit, which is expected to take place mid-afternoon New York time.


The consensus expectation for the vote is that the Prime Minister’s plan will be rejected by a wide margin. In the aftermath of this defeat, there is some expectation of a challenge to May’s leadership (vote of confidence) which could lead to a general election, with the growing possibility of a second referendum. A request will likely be made to the E.U. for an extension of Article 50, the mechanism by which a country withdraws from the Union. The current deadline is March 29, 2019.


The conventional news flow overnight was reasonably sedate. Risk assets have a modest bid, either because of news that China is implementing tax cuts and other stimulus to support domestic growth, or on thin rumors of further progress in the China-U.S. trade negotiations. German GDP for 2018 was an as forecast 1.5%, but received some attention given it was the slowest pace of expansion since 2013. There was no reported progress on the U.S. government shutdown, which is now in its 25th day. 


Treasuries are starting the session in the green, with yields little changed from where they have been in recent days. The 2-year is 2.514%, with 10-year notes at 2.683%. That leaves the 2Y10Y spread at 16.9 bps. 

Staying Close to Shore


January 14, 2019 – The fourth quarter earnings season gets underway this week led by reports from the financial sector. The forward guidance provided in the post-release earnings calls will be closely monitored, given the growing sense that the global economy appears to be at an inflection point. The reduced flow of official economic data, curtailed due to the government shutdown, will also force analysts and investors to place more emphasis on this information as a source of insight.


If business surveys (e.g. ISM, NFIB) provide any indication of corporate sentiment, there is a probability of a modest slowdown in the coming months. Indeed, Wall Street economists seem to be shifting down their growth forecasts for the near term, with several firms penciling in a 2.0% - 2.25% rate (real, QoQ, annualized) of expansion in 2019Q01. Estimates for the quarter just concluded are in the 2.50% - 2.75% range. 


Risk markets are on their back foot as this week’s trading gets underway. China’s trade figures for December were a disappointment, suggesting less external demand for their goods on the export front. Imports were soft as frontloading in advance of tariffs waned, domestic consumption softened, and commodity prices dipped. (Bloomberg) Eurozone Industrial Production was also a disappointment. Tomorrow’s vote in the U.K. Parliament on the Brexit plan is also giving investors an excuse to stay on the sidelines.


There is no U.S. economic data on the schedule for today, so the markets will be casting about for catalyst to price action. The shutdown continues, the administration continues to fend off headlines in a hostile media, and Speaker Pelosi will be kept busy trying to shepherd a fractious caucus comprised of attention seeking individuals.


Treasury yields are a touch lower in this environment, with 2-year notes currently at 2.528%, 10-year notes at 2.686%, and the 2Y10Y at 16 bps. The auction schedule is light this week, with $13 billion of 10-year TIPS scheduled for 1 p.m. ET on Thursday. The regular slate of bills is also on offer. Treasury technicals are positive, with the 50-day mva crossing the 200-day mva on UST 5- and 10-year notes.


Sources continue to report strong foreign demand for UST, as well as solid interest in other high quality sovereign debt. 

“Supply Creates Its Own Demand”


January 11, 2019 – Today’s trading is more about squaring up positions in front of the weekend and next week’s Brexit vote than about responding to any overnight news flow.


The trade story will be shelved for the near term, awaiting the next round of talks and leaks scheduled for later this month.


All eyes will now turn to Westminster, where the U.K. Parliament is scheduled to vote on Prime Minister May’s plan on Tuesday. The current rumor has Britain delaying the imposition of Article 50 beyond March 29 to allow further time for negotiation with the E.U. on the terms of departure. The prime minister’s current stance is that “this is not something we are going to do” (Bloomberg).


There is nothing new to report on the U.S. government shutdown or negotiations on providing funding to build a wall along the U.S.-Mexico border. The shutdown, now at day 21, will drag on into the weekend.


Other items that cropped up over the past 12 hours include a raft of weaker than forecast industrial production numbers from Eurozone countries, an ongoing and notable strengthening in the Yuan, and a couple of surveys of economists (Bloomberg, WSJ) reporting that the odds of a recession in the next 12-24 months are on the rise.


Worth noting, Treasury auctioned $78 billion in notes and bonds this week and each issue is currently trading above its auction price. Primary dealer inventories remain at record highs. The high yield market has been experiencing the opposite dilemma, with a dearth of new issuance over the past several weeks.


Heading into the weekend, risk free rates have declined from yesterday’s close, but virtually unchanged from yesterday a.m. The 2-year note is 2.541% (v. 2.543%), 10-year notes to 2.699% (v. 2.708%), and the 2Y10Y is 15.8 bps (v. 16.5 bps).


Treasury technicals are increasingly positive, with the 50-day mva crossing the 200-day mva on UST 5- and 10-year notes. 



Day 20


January 10, 2019 – Trade issues and petulant behavior in Washington, D.C. are taking a back seat this morning to a flurry of headlines from corporate giants seeking to position themselves for potential changes on the economic horizon. 


Ford Motor has announced a major retrenchment in Europe, addressing a chronic area of weakness in their portfolio of operations. This news comes in advance of an announcement expected in coming weeks of some type of joint venture with Volkswagen. Jaguar Land Rover also announced job cuts, further underscoring a guarded outlook for the automotive sector.  Macy’s and Kohl’s reported disappointing holiday sales results and a cautious forward outlook. American Airlines followed Delta’s recent press release with their own forecast of a reduction in revenues.


The cautious signals emanating from the C-suite represent a contrast to the situation of a year ago, when corporate chieftains were looking forward to the benefits of a significant reduction in tax rates as well as incentives designed to encourage capital investment.


In contrast to these headlines, the jobs market continues to motor along. Initial Claims data, perhaps influenced by the holiday period, dropped by 17k to 216k. On a 4-week average basis, they were 221.75k, up 2.5k. Continuing Claims fell 28k to 1722k.


With economic uncertainty rising, and the government shutdown entering its 20th day, ields have drifted lower. The 2-year note is 2.543%, 10-year notes to 2.708%, and the 2Y10Y has steepened to 16.5 bps. 


Treasury will auction $16 billion of a re-opening of the 3.375% of 11/15/2048 at 1 p.m. ET today.


Hope Springs Eternal


January 9, 2019 – Risk assets are trading to the offered side this morning on hopes that the U.S. and China are making substantive progress in formulating a trade deal. Negotiators met for a third consecutive day (unscheduled), purportedly laying the groundwork for further discussions which are expected to take place in Washington, D.C. later this month.


Analysts have suggested that both Presidents Trump and Xi have a vested self interest in shepherding these talks to a successful conclusion. President Trump is said to want a deal, which he sees as the key to putting the stock market back on the pathway to higher prices. President Xi sees a trade agreement as an important component to stabilizing domestic growth, which is showing signs of fatigue in the face of deleveraging and consumer retrenchment.


While trade negotiations are the key catalyst to market price action this a.m., other story-lines continue to evolve. On the topic of Chinese growth, the government reported that auto sales for 2018 slumped by -6.0% YoY. Nikkei News is reporting that Apple is trimming iPhone production by 10%, presumably also a response to slower consumer demand in China. President Trump gave a brief prime time speech yesterday evening on the importance of building a wall along the southern border. It’s doubtful that this tactic advanced this cause much further and the government shutdown grinds on.


The data calendar today is light. The MBA Mortgage Purchase Applications index was up 23.5% last week, a holiday-distorted figure that will regress to a moderate mean in coming weeks. At 2:00, the FOMC Minutes for the December 19 meeting will provide some context for the recent policy action and perhaps a bit of insight as to how the Committee regards recent volatility in the asset markets.


Treasury will auction $24 billion of a reopening of the 3.125% of 11/15/28 at 1:00.


Yields have edged a bit higher overnight, with 2 year notes at 2.584%, 10 year notes to 2.731%, and the 2Y10Y has steepened a touch to 14.7 bps.  

Glass Half Full


January 8, 2019 – Asset prices continue to claw their way back from the hole they found themselves in at year end. The price action should probably be characterized as corrective, as many of the concerns that spurred the sell-off remain unresolved, and some of the emerging data validates a more tempered viewpoint as the year gets underway.


On the latter issue, overnight news from Samsung painted a picture of slower growth into the new year, as fourth quarter earnings estimates fell short, and forward prospects suggest a further softening of demand. German’s Industrial Production fell by 4.7% YoY in November, after a downwardly revised 0.5% gain (was 1.6%) in October, raising concerns about recession prospects in the EU’s top economy. In the U.S., the National Federation of Independent Businesses released their monthly survey, confirming the same moderation in outlook evident in regional Fed surveys as well as the ISM reports.


Risk assets are higher, however, trading on optimism and suggesting that markets were relatively oversold given the current understanding of growth and earnings prospects. Reports on OPEC exports for December, combined with the possibility that Saudi output may be reduced further, are providing support to the energy sector. Prospects for a constructive outcome from the U.S. – China trade negotiations are also providing support to the markets. For now, a tempering of the sound bites out of D.C., as well as a sense that both sides need a deal, is providing a constructive backdrop to the ongoing discussions.


Economic data in the U.S. continues to be disrupted by the government shutdown. Other than the NFIB survey, the JOLTS Job Openings report will be released this a.m. and Consumer Credit will be reported later this afternoon.


Treasury will auction $38 billion in 3 year notes today at 1:00.


In response to the better tone in equities, 2 year notes have risen to 2.565%, 10 year notes to 2.703%, and the 2Y10Y has flattened about 3bps to 13.8 bps

Markets Attempt Consolidation


January 7, 2019 – The markets are attempting to consolidate after a tumultuous December when positions were challenged by a lack of liquidity, fears of monetary policy rigidity, and concern over political interference in the conduct of that policy. Sectors such as energy, financials, leveraged loans, and technology are attempting to stage modest rallies as the first full trading week of the year gets underway.


Comments by Fed Chairman Powell on Friday went a long way towards assuaging investor angst, underscoring the institutional independence of the Fed and its leadership, while also providing assurance that flexibility in response to financial market signals and economic outcomes will dictate policy decisions. 


The evolution of market performance will ultimately be determined by the trajectory of the economic data and quality of corporate earnings. Other factors, including the resolution of the government shutdown, U.S. – China trade negotiations, Brexit, and the Mueller investigation, will also play an important role in defining the pathway forward.


Treasury yields have remained near local lows, suggesting that bond market participants are retaining a skeptical view of the situation, preferring to hold some insurance against downside risks to growth and inflation. Primary Dealer positions remain at record highs. Treasury repo rates have moved back towards normal levels after the year end spike.


As the government shutdown drags on, risks are accumulating. The Washington Post reports that “…more than $140 billion in tax refunds are at risk of being frozen or delayed if the shutdown persists into February.”


In the aftermath of this a.m.’s number 2 year yields 2.475%, 10 year notes are 2.641%, and the 2Y10Y spread is 16.6 bps. 


Economic Surprise…


January 4, 2019 – Today’s Nonfarm Payrolls data (312k gain v. 185k e) will dominate the market discussion.


The labor market had a great 2018, with the private sector gaining over 2.5 million hires. Total Payrolls stand at 150 million workers, with an Unemployment Rate of 3.9% and Average Hourly Earnings at 3.2% YoY.


The Fed’s job was not made any easier by this number. Their explicit mandate is to manage to maximize employment in the context of price stability. The current employment situation is at, or near, mandate attainment, while Core PCE sits at 1.9%, close to the 2.0% target rate. The central bank, as the main regulator for the financial system, also has a “shadow” mandate to ensure the stability of that system.


Recent volatility in the markets for financial and real assets suggests that policy may be reaching frictional levels. It’s impossible, however, to disaggregate the impact that the move in rates has had, from external factors including the impact of tariffs, the uncertainty regarding trade negotiations, the geopolitics of energy, Brexit, instability in the European financial system, and the political theater of Washington.


In the aftermath of this a.m.’s number 2 year yields 2.477%, 10 year notes are 2.639%, and the 2Y10Y spread is 16.2 bps.

Consumer Fatigue?


January 3, 2019 – Apple’s announcement of slowing revenue growth due to sluggish demand from Chinese consumers adds to a growing sense of unease regarding prospects for growth. Retail Sales data for Hong Kong, released overnight, were the weakest in 17 months, another sign that the incipient deceleration in manufacturing indicated by recent PMI reports is permeating the consumer sector of the world’s second largest economy.


In other market news, foreign exchange traders were jolted by a violent move in the yen, which pushed the currency from the 109 area to as low as 104.87. An algorithmic strategy gone rogue is suspected to have played a part.


The Wall Street Journal is carrying a story about rental companies getting into the business of building houses to address the shortage of supply, while local New York media is focused on the decline in median Manhattan apartment prices below $1.0 million for the first time since 2015 on a glut of supply.


The political class continues to flail, with no resolution on the U.S. budget impasse in sight, and more forecasts of impending disaster if U.K. parliamentarians don’t pass P.M. May’s Brexit deal. China’s President Xi Jinping gave a hawkish speech directed at Taiwan advising the local populace that reunification continues to be a top agenda item for the mainland. 


This morning’s release of ADP’s Employment Change data showed a solid rise in jobs, climbing by 271k compared to expectations of a 180k increase. Initial Jobless Claims were 231k (220k e) with Continuing Claims up by 32k to 1740k versus a 1690k forecast. The weekly data continues to suggest a healthy labor market. Tomorrow’s Nonfarm Payrolls data is expected to show a rise of 180k jobs, with the Unemployment Rate steady at 3.7%, and Average Hourly Earnings up by 3.0% YoY.


As the U.S. session gets underway, the 2 year yields 2.494%, 10 year notes are 2.64%, and the 2Y10Y spread is 14.6 bps. The Fed Funds futures contracts are not pricing in any Fed tightening over the forward 12 months. 

Accumulating Evidence


January 2, 2019 – December’s volatility is, unsurprisingly, bleeding into January, confronting the investor community with a turbulent set of conditions as the year gets underway.


The purported catalyst for the downside movement in risk assets was the Caixin China Manufacturing PMI, which printed at 49.7 compared to an expected 50.2. The “50” level is the area where the manufacturing sector transitions from expansion to contraction, so the dip below caught the market’s attention.


There are other accumulating factors that are suggesting a deceleration in the global manufacturing sector, including recent dramatic drops in the Richmond and Dallas Federal Reserve Banks’ indices of manufacturing activity, a shortfall in South Korean export activity (-1.2% v. 2.5%e) and third consecutive month of a sub-50 reading on Italy’s Markit Mfg PMI index (49.2 v. 48.6p).


In other news, the ECB stepped in to the Italian banking sector to place Banca Carige SpA under administration after a recapitalization plan fell through. In Washington, President Trump is expected to meet with congressional leaders today to discuss possible solutions to the ongoing budget impasse.


U.S. focused investors will be awaiting Friday’s job report, which is expected to show on trend results for the December period. Nonfarm Payrolls are forecast to rise 185k, the Unemployment Rate should hold steady at 3.7%, and Average Hourly Earnings are expected to be up 3.0% YoY.


Also on Friday, Fed Chairman Jerome Powell will participate in a joint interview session with former Fed Chairs Yellen and Bernanke (10:15, American Economic Association, Atlanta).


As the U.S. session gets underway, the 2 year yields 2.49%, 10 year notes are 2.656%, and the 2Y10Y spread is 16.6 bps. The Fed Funds futures contracts are not pricing in any Fed tightening over the forward 12 months. 

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