Rates dip ahead of testimony from Fed's Powell

Published Date 7/16/2018

The IMF today rebuked Trump over the trade war; saying the current threats made by the US and its trading partners risked lowering global growth by as much as 0.5% by 2020, or about $430bn in lost GDP worldwide. Although all economies would suffer from further escalation, the US would find itself “as the focus of global retaliation” with a relatively higher share of its exports taxed in global markets. “It is therefore especially vulnerable,” the fund said.

Now on the to the moment; tomorrow begins Jerome Powell’s two-day testimony in Congress. The focus not directly focused on the Trump/Putin meeting, now it’s about the US economic outlook and what the Fed is thinking. The trade tariffs, the softening of global economic outlooks and what the Fed is prepared to do about more rate increases. Minneapolis Federal Reserve Bank President Neel Kashkari, a non-voter at the FOMC wants no more rate increases, saying the present flat curve is close to neutral. “This suggests that there is little reason to raise rates much further, invert the yield curve, put the brakes on the economy and risk that it does, in fact, trigger a recession,”…… “If inflation expectations or real growth prospects pick up, the Fed can always raise rates then.” The2/10 spread now 25 bps; 5/10 10 bps.

Also tomorrow July NAHB housing market index, expected at 69 from 68 in June. June industrial production and capacity utilization (production expected +0.6%, cap utilization 78.3% from 77.9%.

Crude oil plunged today, -$2.72 to $68.29.

The bellwether 10 yr note traded at 2.87% this morning, after the summit news conference the yield slipped back to 2.85%. Still in that very narrow range. The summit and the coming potential political fallout from it may add additional support for keeping US treasuries from spiking. Suggest tuning in to the national evening news tonight. It is going to take a week or so for the dust to settle, investors should be more motivated to keep some money in safe hands. Until the 10 clears this tight range the prudent approach for mortgage market participants is to remain flat, no bullish or bearish strategies. Bond market volatility extremely low for over a month now. The stock market focus tilting toward Q2 earnings.

More data out of China is adding to concern its economy is slowing. Data released since Friday has affirmed what’s been expected for some time: That an ongoing campaign to curtail credit is putting the brakes on the world’s second-largest economy. Given that China generates as much as a third of global growth, that’s adding to signs that the best world expansion in years is plateauing. The IMF has worried the trade tariffs will slow growth; it is scheduled to release its latest forecast later today. China’s GDP is slowing, but it is still running at 6.7% although the weakest in two years.

This Week’s Calendar:

Monday,

8:30 am June retail sales as reported +0.5%, May revised frm +0.8% to +1.3%; excluding auto sale +0.4%, May revised frm +0.9% to +1.4%.

• July NY Empire State manufacturing index expected at 21, as reported 22.6

10:00 am May business inventories expected at +0.4%, as reported +0.4%

Tuesday,

9:15 am June industrial production and capacity utilization (production +0.6%, cap utilization 78.3% from 77.9% in May)

10:00 am Jerome Powell at the Senate Banking Committee

10:00 am July NAHB housing market index (69.0 from 68.0 in June)

Wednesday,

7:00 am weekly MBA mortgage applications

8:30 am June housing starts and permits (starts -2.8% to 1320K; permits +2.4% to 1330K)

10:00 am Jerome Powell at the House Financial Services Committee

2:00 pm Fed Beige Book

Thursday,

8:30 am weekly jobless claims (220K +6K)

• July Philadelphia Fed business index (22.0 from 19.9)

10:00 am June leading economic indicators (+0.4%)

Source: TBWS

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