Trade and Brexit News Driving Treasury Moves

Oct 15, 2019
Trump and China's Vice Chair

Trade, Brexit and Retail Sales

The holiday-shortened week is fairly light with first-tier economic releases save for the September Retail Sales Report tomorrow. Instead, the trading will be driven by new details of the U.S./ China trade deal and Brexit developments. Treasuries finished last week on the back foot as rumors of a trade deal swirled but they’re trading better this morning as the afterglow of the initial announcement is met with renewed uncertainty. Meanwhile, Brexit developments will continue this week as the October 31st deadline approaches. While a trade deal and improved Brexit prospects are certainly worthy of a back-up in yields, it doesn’t necessarily lay the foundation for a strong economic rebound. Instead, it takes worst-case scenarios off the table so that limits the pullback in yields. At some point the market’s focus will return to the global and domestic economic outlook and if improvement isn’t noted bids will return to Treasuries.

Treasury Curve Today Week Change
3 Month 1.65% -0.06%
6 Month 1.66% -0.01%
1 Year 1.60% -0.01%
2 Year 1.33% +0.10%
3 Year 1.53% +0.15%
5 Year 1.52% +0.16%
10 Year 1.69% +0.15%
30 Year 2.17% +0.14%
Short-Term Rates
Fed Funds 2.00%
Prime Rate 5.00%
3 Mo LIBOR 2.00%
6 Mo LIBOR 1.98%
12 Mo LIBOR 1.96%
Swap Rates
3 Year 1.547%
5 Year 1.516%
10 Year 1.616%
Economic Calendar
Date Statistic For Briefing Forecast Market Expects Prior
Oct 15 Empire Manufacturing Oct 1.0 1.0 2.0
Oct 16 Advance Retail Sales Sep 0.3% 0.3% 0.4%
Oct 16 Retail Sales Ex-Autos & Gas Sep 0.3% 0.3% 0.1%
Oct 16 Retail Sales Control Group Sep 0.3% 0.3% 0.3%
Oct 17 Housing Starts (MoM) Sep -3.2% -3.2% 12.3%
Oct 17 Building Permits (MoM) Sep -5.8% -5.3% 8.2%
Oct 17 Philly Fed Biz Optimism Oct 7.0 8.0 12.0
Oct 17 Industrial Production (MoM) Oct -0.2% -0.2% 0.6%
Oct 18 Leading Index Sep 0.1% 0.1% 0.0%

calendar icon Top 5 Events for the Week

Oct. 15 - 18, 2019

1. Trade & Brexit Developments – All Week
2. September Retail Sales – Wednesday    
3. September Leading Index – Friday
4. October Empire & Philly Fed Surveys – Tues/Thurs.
5. September Housing Starts & Permits – Thursday


1.  Trade and Brexit Developments – All Week

Recent price action in the Treasury market has been far more driven by U.S./China trade deal developments and the improved outlook for a Brexit deal rather than recent economic releases.  As evidence of this, the tame September CPI report came and went last week without a murmur while trade and Brexit developments drove the down-trade in Treasuries.  That said, the trade deal and a Brexit extension don’t have the bearish potential they once might have carried. The downshift in both the global and domestic economies is already well along and the positive trade news is really more about removing worst-case scenarios than catalysts for renewed growth. Thus, once the market digests the details they will return to the economic outlook and that might provide fertile ground for better Treasury bids.


2.  September Retail Sales – Wednesday

If the market can tear itself away from the trade and Brexit headlines the September Retail Sales Report will provide some real economic fodder to digest. The consumer was unfazed during the summer with all the trade and geopolitical handwringing, and even with a  slowing in job growth, confidence and spending have softened only modestly in recent months. That seems to be the expectation as well for September. Retail sales are expected to increase 0.3% versus 0.4% in August and sales ex-autos & gas are expected to be up 0.3% versus 0.1% the prior month.  The Retail Sales Control Group (a direct GDP input) is expected to increase 0.3% matching the August increase.  Thus, expectations are for a decent report, albeit off the strength in June and July and that is why third quarter GDP is expected to be slightly under 2.0% as a result. Bloomberg consensus has third quarter GDP at 1.8% and the Atlanta Fed’s GDPNow Model is forecasting 1.7%.


3.  September Leading Index – Friday

The Conference Board’s Leading Index is a compilation of metrics that tend to foretell economic direction, and it is particularly useful as a predictor of recessions. The index always falls well below zero prior to a recession and earlier in the year the index was flirting with the zero-level and printed a –0.3 in June. The index, however, rebounded later in the summer and would need to move below -1.0 to provide a reliable recession signal. That being said, the September number is expected to tick up to 0.1 from August’s 0.0. If the index matches expectations it will be a signal that the economy has slowed but not, as of yet, flirting with an early-stage recession signal.


Leading Index (YoY)


4.  October Empire Manufacturing & Philly Fed Survey — Tuesday/Thursday

While the consumer has proven resilient to negative headlines and continues to spend and carry the economic load, the manufacturing and business sectors have been more reluctant with trade and global uncertainties.  Manufacturing indicators have fallen into contractionary territory and the October Empire Manufacturing Report is expected to point to continued malaise in the sector. The index is expected to print a 1.0 versus 2.0 in September. The average over the past year was 7.2 with a low print of –8.6 in June and a high of 21.4 last November. On Thursday, the Philly Fed Survey of Business Outlook is expected to print an 8.0 versus 12.0 in September. The past year average has been 11.94.


5.  September Housing Starts & Permits – Thursday

Housing has been on a bit of a roll in recent months and while the September Housing Starts & Permits numbers are expected to soften a bit versus what was a strong August, they are forecast to still exceed annual averages.  Housing starts for September are expected to decrease -3.2% to 1.32 million annualized while permits are expected to decrease –5.3% to 1.35 million annualized. While those numbers may appear disappointing they are compared to outsized gains in August, so a bit of a reversion to the mean is expected. The past year average in starts was 1.23 million and permits 1.31 million. Thus, both September readings are expected to exceed annual averages indicating continued decent momentum in the sector.


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 Yield/Duration Relationship 

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Tom Fitzgerald Signature 

Thomas R. Fitzgerald

Director, Strategy & Research


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