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Fixed Income Market Commentary by Kevin Giddis

August 19, 2019

The Treasury market is trading lower this morning as hopeful news about a trade deal has brought the bulls back into the equity market, pushing the “risk-on” narrative forward to a second day. It has been pointed out by a number of folks that the biggest up day and the biggest down day could be attributed to trade and Trump. If he talks about increasing tariffs on China, we have sold off pretty hard. If he mentions that there could be a deal, then we tend to see an equity market that’s off to the races on the upside. That moment has created a higher opening for stock prices and a lowering opening for bond prices. Where have all of the doomsayers gone? While the track record for a recession after the 2-year and the 10-year invert is pretty darn good, this could also be the first time that this slight inversion could be nothing more than the rantings of program trading and a market misread. Now keep in mind that whenever we see the U.S. economy recede, economists will go back to the day that the 2-year yielded more than the 10-year as the reason why we are in a recession. Don’t let me confuse you into thinking that the U.S. economy isn’t a bit sluggish; I am just saying that the mid-morning inversion may not be the reason for it. I think it is safe to say that if we get a trade deal with China, the stock market will rally, bond yields will go back up, and the Fed may only lower rates twice (25 bps each) for the rest of 2019. If this is part of some “master plan” by the President, then the uncertainty alone could change the way we view economic growth and the future of interest rates. We could get some clues this week as the calendar is full of economic data and the Fed meets in Jackson Hole as part of the Kansas City Fed’s policy symposium. Starting on Wednesday, we will get Existing Home Sales, the FOMC Minutes, Jobless Claims, and New Home Sales. What do you think they will talk about at the Fed’s symposium? This is one of those few times where the bond and stock markets are almost perfectly inversely correlated, and it centers pretty much on trade and tariffs. Stock prices go up, and bond prices go down. Bond prices go up, and stock prices go down. That’s the current picture of today’s market, and it will likely stay that way until all of this plays pout. One thing that we have an abundance of in each market is volatility. The MOVE Index, a good measure of bond volatility, dipped to 55.2468 on July 31st. Last Thursday, it peaked at 90.6170. So it almost doubled in two weeks, which makes almost every day an interesting one. This week is starting out quite strong for equities and weaker for bonds. The emphasis is going to remain on tariffs and trade until either something good happens or the September 1st next-level tariffs are implemented. This makes for yet another good week to pay attention.

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