Volatility is Back
The U.S. economy remains healthy but has started slowing down due in part to the trade war. Real GDP grew at an annualized rate of 2.1% in the second quarter of 2019, down from 3.1% the prior quarter. Some weaknesses were noticeable including net exports, inventory investments, and residential construction spending.
U.S. and Chinese trade officials resumed trade negotiations at the end of July to no avail. In a surprise announcement, President Trump imposed a new 10% tariff on $300 billion worth of Chinese goods starting on September 1, stating that the negotiations were not moving fast enough. Beginning next month, virtually all Chinese imports will be subject to tariffs.
Following this new development, the Chinese yuan weakened to below a key threshold, prompting the U.S. Treasury to officially label China a “currency manipulator.” Interestingly, the International Monetary Fund stated in July that the yuan was “broadly in line with fundamentals” and that the decline against the dollar did not seem abnormally large when comparing to the standards for other emerging markets.
Chances for a rapid resolution of this trade war are now slim, and this latest escalation further worsens the outlook for the global economy. In response, several central banks have already lowered their key interest rates due to lower growth expectations. All these actions will likely cause the U.S. dollar to continue strengthening due to its popularity as a global reserve currency.
Meanwhile, volatility in the markets has increased. The equity market faced large sell-offs as the trade war intensified. In response, investors have been moving into U.S. Treasuries, causing yields to plummet across the curve.
On July 31, 2019, the Fed cut interest rates by 25bps marking the first rate cut since 2008. Chair Powell described this action as a “mid-cycle” adjustment, mildly disappointing the markets that were hoping for more guidance from the Fed. The market is currently pricing the probability of at least another 25bps cut in September at 100%.
Treasury Yields
| Maturity | 8/6/19 | 7/8/19 | Change |
| 3-Month | 1.995% | 2.231% | -0.236% |
| 6-Month | 1.987% | 2.113% | -0.126% |
| 1-Year | 1.802% | 1.995% | -0.193% |
| 2-Year | 1.583% | 1.890% | -0.307% |
| 3-Year | 1.523% | 1.835% | -0.312% |
| 5-Year | 1.513% | 1.856% | -0.343% |
| 10-Year | 1.702% | 2.048% | -0.345% |
| 30-Year | 2.233% | 2.529% | -0.296% |
Agency Yields
| Maturity | 8/6/19 | 7/8/19 | Change |
| 3-Month | 2.019% | 2.227% | -0.208% |
| 6-Month | 2.029% | 2.244% | -0.215% |
| 1-Year | 1.982% | 2.210% | -0.228% |
| 2-Year | 1.647% | 1.961% | -0.314% |
| 3-Year | 1.590% | 1.926% | -0.336% |
| 5-Year | 1.620% | 1.971% | -0.351% |
Commercial Paper Yields (A-1/P-1)
| Maturity | 8/6/19 | 7/8/19 | Change |
| 1-Month | 2.170% | 2.350% | -0.180% |
| 3-Month | 2.170% | 2.300% | -0.130% |
| 6-Month | 2.060% | 2.210% | -0.150% |
| 9-Month | 1.990% | 2.170% | -0.180% |
Current Economic Releases
| Data | Period | Value | |
| GDP QoQ | Q2 ’19 | 2.10% | |
| U.S. Unemployment | July ’19 | 3.70% | |
| ISM Manufacturing | July ’19 | 51.20 | |
| PPI YoY | June ’19 | 0.40% | |
| CPI YoY | June ’19 | 1.60% | |
| Fed Funds Target | August 6, 2019 | 2.00% – 2.25% |