A Hiking We Go…
As the summer holiday season comes to an end, market activity has picked up after Labor Day as the U.S. economy and consumer sentiment remains solid. The unemployment rate remained at 3.90% and nonfarm payrolls rose by 201,000 in August, well above the expected 191,000. There was a slight upward rise in average hourly earnings, implying that the economy could be nearing full employment. While the summer may be over, it is time for hiking season for both interest rates and import tariffs.
At the next Federal Open Market Committee (FOMC) on September 26, 2018, it is widely expected that its benchmark policy rate will increase to a range of 2.00% – 2.25%. The stronger U.S. dollar suggests that the FOMC may continue to raise interest rates, and market expectations lean towards an additional rate hike in December.
These positive developments are somewhat clouded by additional tariffs on virtually all Chinese imports. The Trump administration is now considering adding $267 billion more to the list as early as this month. China matched the first round of tariff hikes on $50 billion of its goods and has issued a list of only $60 billion of American products for possible retaliation, highlighting the trade imbalance between the two countries. It is unclear at this point whether U.S. businesses or Chinese manufacturers will bear most of the burden of the tariffs.
Last month, we commented on geopolitical relations between the U.S. and Turkey and the Trump administration’s higher tariffs on Turkish steel and aluminum. Due to multiple factors, Turkey is on the brink of an economic slowdown, causing the lira to plummet. However, its central bank has not raised interest rates and hinted that monetary tightening would soon be coming. Texas CLASS is monitoring any spillover effects to other emerging markets.
Treasury Yields
| Maturity | 9/7/18 | 8/10/18 | Change |
| 3-Month | 2.095% | 2.043% | 0.052% |
| 6-Month | 2.299% | 2.216% | 0.083% |
| 1-Year | 2.507% | 2.394% | 0.113% |
| 2-Year | 2.703% | 2.604% | 0.098% |
| 3-Year | 2.772% | 2.679% | 0.093% |
| 5-Year | 2.821% | 2.745% | 0.076% |
| 10-Year | 2.939% | 2.873% | 0.066% |
| 30-Year | 3.101% | 3.030% | 0.071% |
Agency Yields
| Maturity | 9/7/18 | 8/10/18 | Change |
| 3-Month | 2.124% | 2.062% | 0.062% |
| 6-Month | 2.255% | 2.148% | 0.107% |
| 1-Year | 2.428% | 2.322% | 0.106% |
| 2-Year | 2.755% | 2.659% | 0.096% |
| 3-Year | 2.825% | 2.738% | 0.087% |
| 5-Year | 2.931% | 2.859% | 0.072% |
Commercial Paper Yields (A-1/P-1)
| Maturity | 9/7/18 | 8/10/18 | Change |
| 1-Month | 2.060% | 2.050% | 0.010% |
| 3-Month | 2.260% | 2.250% | 0.010% |
| 6-Month | 2.470% | 2.460% | 0.010% |
| 9-Month | 2.600% | 2.600% | 0.000% |
Current Economic Releases
| Data | Period | Value | |
| GDP QoQ | Q2 ’18 | 4.20% | |
| U.S. Unemployment | Aug ’18 | 3.90% | |
| ISM Manufacturing | Aug ’18 | 61.30 | |
| PPI YoY | Aug ’18 | 4.20% | |
| CPI YoY | Aug ’18 | 2.90% | |
| Fed Funds Target | Sept ’18 | 1.75% – 2.00% |