Trade Fears Abound

August 12, 2019 Chatham Financial

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.

Rates Snapshot

Sources: Bloomberg Finance L.P., (Treasuries) Chatham Financial (Swap Curves), FHLB Boston, Chicago, Dallas, Des Moines for FHLB Advance Rates. Wells Fargo Brokered CD Indications.

 

Market Implied Policy Path (Overnight Indexed Swap Rates)

Source: Chatham Financial

 

Fixed Income Snapshot

Source: Bloomberg Finance L.P.

 


Disclosures

Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit https://www.chathamfinancial.com/legal-notices/.

Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved. 19-0202

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