Shifting Trade News Whipsaws Markets

Just when you thought it safe to ride stocks into year-end, and perhaps lighten your fixed income positions, trade wars and tariff threats moved back front and center darkening the mood and setting a risk-off tone this week.  The president’s threats of tariffs against a growing list of nations, not to mention  a stated willingness to delay a trade deal with China beyond next November’s elections accounted for the shift in market tone. This morning, “sources close to the talks” insist the US and China are, in fact,  moving closer to agreeing on the amount of tariff rollback to get a phase 1 deal so stayed tuned as the headlines change quickly. In any event, after reaching a three week high of 1.86% early yesterday, 10yr Treasuries are back at 1.74% which is near range resistance of 1.70%, a level that has held for more than a month. The quick and volatile moves highlight the extent to which trade headlines and events are driving market direction. We look in more detail below at the issues that might move yields through resistance.

Economic News Year-End Liquidity Concerns? Agency Indications

  Economic News

• First and foremost a further ratcheting up of heated trade rhetoric would add fuel to the bond market rally. In that regard China wasted no time responding to the news of possible trade deal delay by threatening to publish a list of “unreliable entities” that could lead to sanctions against US companies. Should they move forward with such a list along with sanctions that would be good for a another risk-off rally that pushes yields lower.

• Meanwhile, France said the EU would retaliate if the US follows through on a threat to hit about $2.4 billion of French products with tariffs in response to digital tax that is focused on Facebook, Amazon, Apple and Google. Widening another front in the global trade wars would also be a good way to get yields legging lower.

• Later this morning we’ll get the ISM Non-Manufacturing Index and while it’s expected to print a solid 54.5, the unexpected weakness in the latest ISM Manufacturing Index on Monday has added a bit of suspense to today’s release. If it does disappoint, even without dipping below 50.0, it could add to the bid in Treasuries  as investors worry that the weakness in manufacturing is spilling over to the larger services sector. In addition, a ramping up of saber-rattling on the trade front will only add to the manufacturing headwinds and that could amplify the spillover impact to the services sector.

• The ADP Employment Change release this morning reported a disappointing 67,000 new private sector jobs in November, well short of the 135,000 expectation. Friday’s BLS jobs report is expecting a more robust 178,000 private sector print but  boosting that number are 50,000 returning GM strikers that ADP’s methodology didn’t  include.  Backing out the GM workers puts the BLS expectation at 128,000, well above today’s ADP print. The ADP miss adds a little more drama to Friday’s BLS number. If the report does disappoint it will surely elicit a bullish bond response.

• The FOMC is not expected to alter the fed funds rate next week, but if trade rhetoric and bellicose actions continue a Fed in pause mode until at least the January 29th meeting could elicit a “they’re behind the curve” response with longer Treasuries rallying accordingly.