Morning Report: Trump trade tweet sends bond yields lower

Vital Statistics:

 

Last Change
S&P futures 2941 -11.5
Oil (WTI) 55.51 1.04
10 year government bond yield 1.90%
30 year fixed rate mortgage 3.96%

 

Stocks are lower after yesterday’s Trump Trade Tweet. Bonds and MBS are up.

 

Donald Trump sent bonds higher yesterday afternoon with this tweet saying that trade talks had broken down between the US and China, and he was therefore imposing an additional 10% tariff on $300 billion in goods from China. This sent stocks reeling, and the 10 year bond yield down about 10 basis points. MBS were slow to react, however we did have some reprices late in the day. If you look at the box scores above, you’ll see we finally have a 3 handle on the 30 year fixed rate mortgage. Commodities were also slammed, with oil down 8%.

 

The escalation in the tariff wars caused some strategists to bump up their probabilities of a September rate cut. Goldman’s Jan Hatzius sees a 70% chance of 25bps, 10% of 50, and 20% of no change at the FOMC meeting next month. This was mirrored in the Fed funds futures market, however the 50 basis point cut looks unlikely. They Sep futures are pricing in an 85% chance of another 25 bps. They were pricing in a 56% chance of a rate cut before the tweet came out.

 

Some of the rally in bonds yesterday was almost certainly due to convexity-related buying, which means hedge adjustment activity. This sort of buying is invariably violent and temporary, which means mortgage backed securities will probably lag the move for a day or two. That said, the path of least resistance for rates remains down, especially since overseas bond yields followed along. The German Bund now yields negative 48 basis points. In fact, their longest term bond – 29 years – is now negative. Think of it: tying your money up for 29 years to get…. absolutely nothing. This is the fixed-income equivalent of buying Salon.com stock at 1000x pageviews in 1999.

 

bund

 

Jobs report data dump:

  • Nonfarm payrolls up 164k (in line with expectations)
  • Unemployment rate 3.%
  • Average hourly earnings up 0.3% MOM / 3.2% YOY (better than expectations)
  • Labor force participation rate 63%
  • Employment / population ratio 60.7%

Overall a good report, and now stock bullish given the Fed’s new posture. Wage growth is picking up and average hourly earnings keep trending upward despite PCE inflation that is stuck in the high teens.

 

average hourly earnings

13 Responses

  1. Worth noting:

    “US to set up plan allowing prescription meds from Canada
    By RICARDO ALONSO-ZALDIVAR
    July 31, 2019”

    https://www.apnews.com/693b64d70b5b44ed988b091d57413eb3

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    • From the comments:

      To everyone knocking “identity politics”, I ask what do you think the GOP has been doing for the last three decades? But as soon the Democratic Party (rightly) starts to give voice to the issues of specific members of its coalition, the GOP coined identity politics as a pejorative. It’s unfortunate to see the Left adopt this thinking.

      What? Really? The Democratic Party just started doing identity politics? Wow.

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      • nobody does projection like the left.

        although i do think it is a deliberate rhetorical tactic they use to neutralize any criticism of them. you can see it on PL, where they will call you “snowflake” if you push back against the idea that you are some sort of social monster for disagreeing with them. Anything that can’t be turned back on the opponent, like “SJW” (because there is no Republican analog) becomes racialized to make it unacceptable to use in public.

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  2. its majority relies on white districts.

    This has always been my problem with the left’s constant “demographics is destiny” and their fantasy that the country is now majority “minority”, and thus white people no longer have an impact on elections–or won’t in the next one, for sure. It makes no sense because no matter what you do to extrapolate demographic trends, it’s still a majority white country filled with important majority white districts for at least a decade, maybe two, maybe three. So, they can ignore white people.

    I’ve read articles suggesting that finallyDemocrats can ignore white voters, because they are just aboutto be overwhelmed by the minority population. I’ve also read articles suggesting that Democrats can ignore flyover country, rural voters, and small town America because “almost all” the population is in the big cities now, and cities are growing! They can ignore Christians because church attendance is down and sinking, they can ignore men because men are less than half the population and so on and so forth.

    It’s a weird, persistent fantasy that they can ignore everybody who they can’t convince or doesn’t like their more extreme positions or live lives they don’t understand, but think look stupid and boring. So far, I don’t think identity politics has been a great vote getter for them outside of a few selective pockets–and most of the people who will be won over by identity politics are probably already voting for Democrats. Turning up the volume, it seems to me, is only likely to cost them votes.

    Eh. The narcissism of small differences.

    Concerns about a lack of people of color in critical roles at the campaign arm, the Democratic Congressional Campaign Committee, prompted a huge shake-up this week and an intense scramble to include more minority staff members at the top echelons of the organization.

    Here’s the thing. When this process happens naturally (that is, white guy leaves or retire, and the job becomes available, and a qualified multi-minority applies and a qualified white guy applies and you pick the minority because they have the skills–or most of them–and the demographics just start to reflect the larger environment) things usually work out pretty well, or no worse than before.

    When you “upheave” and shake things up just to push out one race or gender and replace them with another race or gender, things very rarely work out better.

    For example: The longer-term fallout may be for Representative Cheri Bustos of Illinois, the campaign committee’s chairwoman from Trump country, viewed as a rising Democratic star who had cracked the code on appealing to white working-class voters.

    That sounds like exactly the kind of person they need to win elections rather than virtue-signaling wars, and that’s the kind of person they are pushing out. And if virtue-signaling alone won elections, that would be fine. But generally, I don’t think it does.

    I’ve mentioned before (and I will again) that Peter Brown laid it all out in Minority Party just before Clinton got elected. And while the Democrats have won the presidency with the frequency predicted by history (once every 8 to 12 years), the reality is the party has struggled in congress and been mostly in retreat at the state level since 1992. Eh, book is worth reading if you can find it at your local library. 😉

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  3. Just finished White by Bret Easton Ellis. A lot of it is cultural score-settling however he does talk a lot about the resistance from the viewpoint of a liberal who thinks they are now just batshit crazy…

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    • “educated” would have been able to do the math to figure out there is no way they will ever earn enough to recoup that 500k

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  4. Interesting piece:

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    • haven’t read it yet, but you cannot give away $1MM+ property around here… Part of that is the shrinking of the financial sector, but i can’t imagine CT and NY taxes along with the MID isn’t playing a part…

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