Global trade continues to dominate markets

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Published Date 3/12/2018

Both stocks and bonds started the week this morning with little changes. Stock indexes were slightly better with the 10-yr note yield at 2.88% -1 bp. MBS prices at 8:30 am EST was up +5 bps from Friday’s close.

This week’s calendar has key economic data; CPI, PPI, Retail sales and housing starts and permits. Today two Treasury auctions will take place; at 11:30 am $28B of 3s, and at 1:00 pm $21B of 10s will be re-opening the issue from February. Treasury budget is expected to explode -$216B, which may get some comments as monthly federal deficits are expected to be about $1Trillion this fiscal year that ends at the end of September. Government debt is set to increase this year, the next and the next and the next from the tax cuts and infrastructure spending.

At 9:30 am the DJIA opened up +44 after +440 on Friday, NASDAQ was up +18, S&P added +3. The 10-yr at 9:30 am was at 2.88%, down -1 bp. The Fannie 4.0 coupon was up +5 bps from Friday’s close and +12 bp from 9:30 am Friday. The 10-yr auction at 1:00 this afternoon will provide a current reading on demand.

International trade is continuing to move forward. Secretary of Commerce Wilbur Ross will be meeting with EU representatives to begin talks to work out new Trump trade deals deemed unfair to US farmers and manufacturers. Early last week talks of trade wars dominated at the start of the week, but as the weeks went on the fear dissipated as realists came around to believe Trump won’t push as hard as his rhetoric suggested. What the president wants is to redo most of the trade deals he believes are not best for the US, citing foreign trade partners having taken advantage of the US for years. Over time he will get new deals, it will take time and markets should get used to it. Grain and soybean markets faced selling late last week amid worries about potential retaliation by countries affected by the Trump administration’s tariffs on steel and aluminum imports.

Last Friday’s strong Feb jobs report assures the FOMC will make its first move to increase the Federal Fund rate next week at the FOMC meeting. There is talk still floating that the Fed may move four times this year to increase it by 1.0%. Three increases are almost a certainty now as inflation moves moderately higher. Tomorrow the February Consumer Price Index and Wednesday the PPI should add more conviction that the FOMC has to move. There are concerns at the Fed among an increasing number of officials that the Fed may not be moving rapidly enough to control inflation.

Global trade are the headlines; arguments on both sides of the developing confrontation between the US, China and Europe are just getting started. While we are on the optimistic side that new trade deals will be reached, most news implies the outlook is grim and trade fights will increase. Future tariffs, particularly those targeting intellectual property, are likely to be aimed more precisely at China.

The 10-yr remains tethered to 2.90%;  there is no strong momentum to improve, although some demand does show up at 2.90%/2.95%. This afternoon’s 10 yr auction will provide another measurement of demand; last month’s 10-yr auction wasn’t strongly bid.

This Week’s Calendar:

Monday,

11:30 am $28B 3 yr note auction

1:00 pm $21B 10 yr note auction

2:00 pm February Treasury budget deficit (-$216B)

Tuesday,

6:00 am February NFIB Small business optimism (107.01 from 106.09)

8:30 am February CPI (+0.2%, excluding food and energy +0.2%; yr/yr +2.2%, core yr/yr +1.9%)

1:00 pm $13B 30 yr bond auction

Wednesday,

7:00 am weekly MBA mortgage applications

8:30 am February retail sales (+0.4%, ex autos +0.4%)

• February PPI (+0.2%, core +0.2%)

10:00 am January business inventories (+0.5%)

Thursday,

8:30 am weekly jobless claims (230K unchanged)

• February import and export prices (imports +0.3%; export prices +0.3%)
• March Philadelphia Fed business index (23.3 from 25.8 in February)

10:00 am Mar NAHB housing market index (72, unchanged from February)

Friday,

8:30 am Feb housing starts and permits (starts 1283K -3.6%; permits 1330K -4.2%)

10:00 am Mar U. of Michigan mid-month consumer sentiment index (98.5 from 99.7 in February)

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