China Retaliates on Trade with Treasuries Rallying on Risk-Off Mood

May 13, 2019
Frustrated Traders at New York Stock Exchange

Trade, Retail Sales, Fed Speak and More

After a week that saw the U.S./China trade talks dissolve into accusations and recriminations, tariffs and countermeasures, this week is seeing additional fallout. The Chinese have announced tariffs on $60 billion of U.S. goods and the president has announced a one-month deadline for tariffs on another $325 billion in Chinese goods. The news has markets in a risk-off mood with Treasuries the beneficiaries of the latest flight-to-safety trade. Away from trade news we’ll get April Retail Sales on Wednesday, the Leading Index and Consumer Sentiment on Friday, and during the week seven Fed speakers will give us their latest views in light of the soft CPI release and the trade imbroglio. After March’s pop in retail sales the April numbers are expected to return to more normal levels but still representative of decent consumer spending. The Leading Index for April is due Friday and while it flirted with negative territory earlier in the year it rebounded in the last couple months with April expected to remain positive as well. Finally, Friday brings consumer sentiment and it’s expected to show similar confidence readings to April.

Treasury Curve Today Week Change
3 Month 2.41% UNCH
6 Month 2.42% -0.02%
1 Year 2.34% -0.03%
2 Year 2.19% -0.10%
3 Year 2.15% -0.11%
5 Year 2.19% -0.09%
10 Year 2.41% -0.08%
30 Year 2.85% -0.04%
Short-Term Rates
Fed Funds 2.50%
Prime Rate 5.50%
3 Mo LIBOR 2.53%
6 Mo LIBOR 2.59%
12 Mo LIBOR 2.69%
Swap Rates
3 Year 2.212%
5 Year 2.220%
10 Year 2.385%
Economic Calendar
Date Statistic For Briefing Forecast Market Expects Prior
May 14 NFIB Small Business Optimism Apr 102.3 102.0 101.8
May 15 Empire Manufacturing May 8.0 8.0 10.1
May 15 Retail Sales (MoM) Apr 0.2% 0.2% 1.6%
May 15 Retail Sales Ex-Auto & Gas (MoM) Apr 0.4% 0.3% 0.9%
May 15 Retail Sales Control Group (MoM) Apr 0.3% 0.3% 1.0%
May 15 Industrial Production (MoM) Apr 0.0% 0.0% -0.1%
May 16 Housing Starts (MoM) Apr 6.2% 6.0% -0.3%
May 17 Leading Index Apr 0.2% 0.2% 0.4%
May 17 U. Of Mich. Sentiment May P 97.5 97.5 97.2

calendar icon Top 5 Events for the Week

May 13 - 17, 2019

1.  Trade Developments – All Week
2.  April Retail Sales – Wednesday
3.  Fed Speak – All Week
4.  April Leading Index – Friday
5.  U. of Mich. Consumer Sentiment - Friday


1.  Trade Developments — All Week

After last week’s breakdown in China trade negotiations the fallout continues to reverberate. Over the weekend China announced tariffs on $60 billion of U.S. goods. Meanwhile, President Trump has announced a one-month deadline to initiate 25% tariffs on $325 billion –essentially the remaining balance of Chinese goods to the U.S. The latest news has markets in risk-off mode with Treasuries the beneficiaries of the latest flight-to-safety trade. It’s interesting to note too that China’s currency—the yuan-has weakened close to levels seen during the fourth quarter meltdown in financial markets. That will make Chinese goods less expensive, U.S. goods more expensive and pressure emerging markets to match the currency decline and that will cause their dollar-denominated loans to be more expensive. It certainly looks as though the trade deal/negotiation phase has moved into more of a trade war and that can only undermine global confidence and the growth outlook.


Chinese Yuan Currency


2.  April Retail Sales – Wednesday

March retail sales really popped and that helped save consumer spending in the first quarter, and that in turn helped first quarter GDP to a surprising beat at 3.2%. April retail sales are expected to reflect a return to earth but any disappointment against expectations could cause some unease at the Fed after the trade tempest and softer-than-expected April CPI. Overall sales are expected to increase 0.2% versus a whopping 1.6% gain in March. Sales ex-autos & gas, however, are expected to be up a solid 0.4% versus an impressive 0.9% in March indicating the modest overall number for April will be from softer auto sales.  The Retail Sales Control Group (a direct GDP input) is expected to increase 0.3% versus 1.0% in March. While a reversion-to-the-mean from March is certain a fairly positive read is expected.  Meanwhile, the Bloomberg consensus for second quarter GDP is 2.0% while the Atlanta Fed’s GDPNow model is calling for 1.6%.


3.  Fed Speak — All Week

After the U.S./China trade kerfuffle last week and the softer-than-expected April CPI we’ll have a full slate of Fed speakers to provide further insight into their outlook on the economy and monetary policy.  The headwinds generated off increased tariffs and tit-for-tat retaliation by the Chinese has to concern the Fed. Combine that with the somewhat soft April inflation read and the expected slowing for second quarter GDP and the Fed remains squarely in pause mode with a possible easing lean if the aforementioned headwinds and soft inflation read increases. With seven different Fed members speaking this week we’ll get a feel for any increased level of concern, or if its generally steady-as-she-goes, at least for now.


4.  April Leading Economic Index – Friday

The Conference Board’s Leading Index is a compilation of metrics that tend to lead the economy. That in itself is useful but perhaps more important these days it also has a solid record of predicting recessions. The index always falls below zero prior to a recession and earlier in the year the index was flirting with the zero-level. The index, however, will need to move below -1.0 to provide a reliable recession signal. That being said, the April number is expected to dip from March’s 0.4 to 0.2. If the index matches expectations it will be another signal that while a slowing economy is expected, the probability of dipping into recession remains remote.


5. Preliminary May U. of Michigan Consumer Sentiment — Friday

Recent consumer confidence readings—University of Michigan and Conference Board—took hits due to the market volatility in the fourth quarter but with the rebound in stocks this year, and a continued solid labor market, the preliminary May read from the University of Michigan is expected to show continued stabilization. Expectations are for a 97.5 print versus 97.2 in April. The high print was a 101.4 in March of 2018 when tax cut euphoria was running high. Inflation estimates are expected at 2.5% for the 1yr period and 2.3% for the 5-10yr horizon. The 5-10yr horizon average over the past year has been 2.5%. The Fed will want to see those expectation stabilize and not continue to drift lower.



bar graph icon  Investment Yield Ranges Over Last Year


US TreasuriesFHLB Agency BulletsMortgage Backed SecuritiesMunicipalsUS Corporate - FinancialsUS Corporate - Financials 

Source: Bloomberg



Tom Fitzgerald Signature 

Thomas R. Fitzgerald

Director, Strategy & Research


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