Yes, rates have moved up. Is that a surprise to anyone? Shouldn't be. Were you hoping tariffs hurt our economy and push rates back down?
Don't hold your breath. So, what should we know about why rates are doing what they're doing? Any reason for rates to fall?
Not in my opinion, here is a link to a video I posted originally back on March 7, 2018:
Last week (9/10-9/14) economic data showed year-over-year inflation, strong business optimism and labor markets, but soft retail sales. PPI for August was down 0.1 percent for the month, however was up 2.8 percent over the previous twelve months due mostly to rising oil prices. The year-over-year gain is below the recent high in June of 3.4 percent. CPI was up 0.2 percent in August and 2.7 percent over the last year also due mostly to increased energy costs. The National Federation of Independent Business reported their Small Business Optimism Index at 108.8 in August, a record high for the 45-year history of the index. The JOLTS report showed that hiring remains robust and quits are still high.
Going back a little farther, economic indicators remain positive and point to continued growth in the third quarter. The trade tensions with China remain at the forefront of the news, but to date there has been little evidence of a negative effect from the tariffs. Should things continue to escalate one would expect more measurable impacts to flow through to the data. July's payrolls posted another month of gains and May and June were revised upward while the unemployment rate eased to 3.9 percent. Average hourly earnings were up 2.7 percent on a yearly basis, however the Consumer Price Index increased 2.8 percent over the previous twelve months ending in June so most workers are not seeing real increases in incomes. The trade gap widened by $3.2 billion in June as exports eased and imports of goods increased by $1.4 billion. Auto sales eased in July to a 16.8 million rate from 17.2 million in June and are expected to continue to decline over the next year. We all know that the FOMC kept the Fed Funds target even after its last meeting and recent data has not altered markets expectations for an increase after the September meeting.
Economists believe that the economy is heading towards a "positive output gap." An output gap is a signal that the economy is not operating at maximum efficiency and a positive output gap indicates excessively high demand which, in turn, spurs inflation as labor costs as well as the prices for goods increase as a response to increased demand. The Employment Cost Index reported that compensation costs for civilian workers increased 2.8 percent on a year-over-year basis in June, the largest annual increase since 2008. The ISM Manufacturing index remains in expansion territory with at a level of 58.1, however comments from the respondents highlighted concerns about the current trade environment. Payrolls data continues to be positive and the broad U-6 measure of unemployment, which counts those currently working part-time for economic reasons as well as those marginally attached to the workforce, reached its lowest level since 2001. All this is to say that the data hasn't given the markets any reason to suspect that the Fed will increase or decrease its pace of interest rate increases as we move through the rest of the year.
The US economy accelerates and decelerates and rarely runs at the same steady consistent pace for prolonged periods. Many think that the current pace of job growth, which has driven the recent economic acceleration, is unlikely to be maintained through 2019 as there are currently more job openings than unemployed workers. Higher interest rates and labor shortages may eventually constrain the economy as business will have to spend more to keep expanding production. The Federal Reserve will likely need to slow the pace of rate hikes next year as it reaches the peak fed funds rate for this expansion.
Trading of US Treasury securities is shifting to direct-streaming venues from electronic platforms to avoid minimum spread sizes and high platform fees. The alternative venues represent only about 10% of the market, but experts say the shift is gathering momentum.
As I mentioned yesterday, a tariff will be imposed on $200 billion worth of imports from China, starting September 24. The tariff will begin at 10.0% but will increase to 25.0% on January 1. Chinese officials have already indicated plans to retaliate, which is expected to trigger the imposition of a tariff on another $267 billion worth of imports from China. That news was enough to shoot the U.S. 10-year up to 3.05% as of yesterday's close. Interestingly, the U.S. Treasury sold four-week bills at a yield above 2.000% for the first time in a decade. Finally, on the international front, Japanese officials are expected to offer measures to reduce Japan's trade surplus with the United States to avoid tariffs on auto exports.
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