Prior Week Summary
Trade war jitters gripped markets last week and sent U.S. equities and Treasury yields lower. After the Trump administration announced a 10% tariff on $300 billion of Chinese goods the week prior, China responded on Monday morning, suspending U.S. agricultural imports and allowing the yuan to sink below the psychologically significant 7.0 per dollar level. The escalation in tensions precipitated the largest one-day drop in U.S. equities for 2019, and raised the likelihood of a September rate cut, as the Fed Funds futures market is now pricing in a 100% chance for a September rate cut, and just over a 20% chance of a 50 basis point cut. U.S. equities pared most of Monday’s losses by Friday morning, but President Trump further escalated trade tensions Friday afternoon suggesting that trade negotiations between U.S. and Chinese officials, scheduled for early September, may be called off saying, “We’ll see whether or not we keep our meeting in September. If we do, that’s fine. If we don’t, that’s fine.” In response to the increasingly uncertain outlook, recession fears reached a fever pitch last week as the closely-watched 3 month – 10-year treasury spread saw the deepest inversion since July 2007, and the 2 year – 10-year treasury spread fell below 10 basis points, also the lowest since July 2007.
The Look Forward
Aside from watching trade developments, market participants will be looking forward to a busy week of economic releases as updated figures on the Consumer Price Index, the Empire Manufacturing Index, retail sales, industrial production, and housing starts all dot the economic calendar.
Market Implied Policy Path (Overnight Indexed Swap Rates)
Fixed Income Snapshot
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