Weak retail sales, stocks jump and rates flat

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Published Date 5/15/2019

Bare bones today: the 10-year T-note today fell below 2.40% for the first time since March 27, but hardly dramatic, all the way to 2.38%. The last time the 10-year T-note was lower than today and the March 27 resistance: December 2017. It will take significant events to break lower quickly.

Media focus today is on the 0.2% drop in April retail sales, but that’s not a serious indicator, especially not after the 1.7% bulge in March. Treasury yields began to decline during the night on weak data from China. Be careful: China data is always suspect, if only because no one there is allowed to question government reports, and the US economy is okay.

Long Treasurys respond to all sorts of things, sometimes clear and sometimes not. The feel in this one... the 10-year since March 27 never above 2.57%... why the paralysis? Bracket this market: 10s can’t drop until a Fed cut is in prospect. Do NOT pay attention to the Fed funds futures market (you can make good money betting against it.). Instead watch the 2-year T-note, which has slipped just below the bottom of the Fed’s 2.25%-2.50% target range, but at 2.17% is not yet a forecast of a cut.

On the other side: 10s are pulled down by low inflation numbers, the Fed in denial, and Powell a good internal guy but off to a bumpy start as a spokesperson. 10s are down also because of tariffs and threats of war (Iran, DPRK, Venezuela), and German and Japanese bonds again below zero.

One last thing, in deadly dangerous political ground, and meaning no offense to any reader. At bond desks, all politicians are regarded with contempt and so seldom matter. But this time, the peculiar paralysis in Treasurys in a situation made for volatility... President Trump is driving markets with simple Tweets. Markets are supposed to make sense of events, but there is no sense here. Thus anxiety pulls down rates but with no clarity.

If 10s break below 2.35% there is nothing on charts to stop a deeper drop, but the Fed is in the way. Any outbreak of peace and good sense, and we could quickly begin to chase 3.00%. You’ll rarely see days more uncertain.

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