Trade Tensions, July Inflation Numbers and Treasury Supply on Tap This Week

Aug 06, 2018
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Trade Talk, Inflation and Treasury Auctions Highlights for Week

The week after the jobs report is always a bit anti-climactic with trade talk/negotiations probably dominating this week’s headline. The possibility of increased tariffs against Chinese imports and the likely tit-for-tat retaliation could provide a flight-to-safety bid in Treasuries. Away from political developments, the CPI reading for July will garner interest on Friday as 2+% YoY readings face-off against slowing price momentum. Also this week will be a trio of Treasury auctions tomorrow, Wednesday and Thursday. Increased supply remains concentrated on the short-end (this time the 3-year note) but issuance of 10-year and 30-year bonds will provide a good test of longer-end demand in the face of sub-3% yields and slightly increased size ($1billion larger in each issuance).



Short-Term Rates

Short-term Rates

Economic Calendar

Economic Calendar


Top Events of the Week Top 5 Events for the Week

AUG 6 - 10,  2018

1.  Trade Negotiations — All Week
2.  July Inflation Readings — Thurs./Fri.
3.  Treasury Auctions — Tues./Wed./Thur.  
4.  June JOLTS Job Openings — Tuesday
5.  July Real Average Hourly Earnings — Friday



1.  Trade Negotiations — All Week

After a week consumed with central bank meetings and the July jobs report this week should be full of tariff headlines. The Trump administration has initiated discussions to possibly raise the tariff rate on certain Chinese imports from 10% to 25%, and China has promised to follow through on additional retaliatory tariffs. The U.S. is looking at China’s currency which has declined 9% since it hit a high in mid-March. That decline reduces the cost to U.S. buyers and hence eases the impact of tariffs. Thus, the administration is considering raising the rate to 25%.  The decline in the Chinese currency is not all about official manipulation as the economy is showing signs of weakening and capital flight is contributing to some of its decline as well.  Expect the rhetoric and threat of tit-for-tat retaliation to reignite this week. The softening in the Chinese economy and currency depreciation has also been weighing on commodity prices, which will work to suppress inflation readings. Combine that with a possible slowing in international trade and it provides several positives for Treasuries which is why we remain bullish on the longer-end of the curve.


2.  July Inflation Readings — Thursday/Friday

This week the big item apart from tariff talk headlines will be July inflation readings. The first will be wholesale price increases in the form of PPI due Thursday while the more important consumer inflation series will be released Friday.  Expectations are for July to be up 0.2% versus 0.1% in June. The core rate (ex-food and energy) is expected to increase 0.2%, matching the June gain.  On a year-over-year basis, CPI is forecast to stay at June’s 2.9% while core CPI YoY is expected to also stay at 2.3% for the second straight month. While the YoY measures are above the Fed’s stated 2% benchmark two things need to be mentioned: first, the Fed’s preferred inflation measure, Core PCE, remains under 2% at 1.9%; second, the three-month annualized rate of core CPI continues to drift lower at just 1.7%. Given the strengthening in the dollar and the above-discussed softening in commodity prices it’s hard to envision the downward momentum in core readings reversing anytime soon. Thus, when looking for things that might get the Fed to pause add softening inflation momentum to the weakening global financial conditions mentioned above.


Core CPI


3.  Treasury Refunding Auctions —Tues./Wed./Thurs.

The Treasury will once again test the market’s gag reflex this week as it sells  a trio of notes and bonds. Tomorrow, $34 billion in 3-year notes will be on offer. On Wednesday, the longer-end of the curve will get tested with $26 billion in 10-year notes followed by $18 billion in 30-year bonds on Thursday. For context, in August 2017 the auction sizes were $24 billion (3yr), $23 billion (10yrs), and $15 billion (30yrs). As can be seen, the shorter-end is bearing the brunt of increased supply but that’s expected to shift some in 2019 as additional increases in supply move further out the curve. Thus, supply-induced yield increases will be short-end events this year while longer-term issues are likely to see more impact next year.


4.  June JOLTS Job Openings — Tuesday

The JOLTs report (Job Openings and Labor Turnover) is due tomorrow, and while June data, it does provide a few additional indicators of job market health. The headline job openings number is expected to be 6.625 million versus May’s 6.638 million print, and over the 6.223 million average over the past year. The Quits Rate is another number the Fed utilizes as it measures the rate workers are leaving jobs voluntarily. The rate was 2.4% (quitters divided by total workers) in May which set a new cycle high.


5.  July Real Average Hourly Earnings YoY — Friday

The Personal Income and Spending report last week revealed that while earnings gained 0.4% for the month, and the year-over-year gain hit a ten-year high at 2.8%, the real income level—adjusted for inflation—was actually negative as CPI logged a 2.9% rate for the same period. The July Real Average Hourly Earnings YoY release on Friday is likely to show another flat to negative print as moderate wage gains are more than offset by inflation gains over the corresponding twelve months. The good news is that inflation momentum could be waning while wage gains should continue given solid job growth.




Technicals Investment Yield Ranges Over Last Year


US Treasuries

FHLB Agency Bullets

Mortgage Backed SecuritiesMunicipals

US Corporate - Financials

US Agency Swap Rates

 Source: Bloomberg





Tom Fitzgerald Signature

Thomas R. Fitzgerald

Director, Strategy & Research



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