US 10-Year Treasury yields closed the week (and month/quarter) a fraction of a basis point above 2% after falling a further 5 basis points in what is now an 8-week rally; equities waned a little with the S&P 500 down -0.3% on the week. Much of the week saw muted trading in anticipation of the weekend’s G20 summit offsetting some of the usual end of month/quarter activity. Meanwhile, in Europe Bund 10-year yields fell further into new negative territory reaching -0.335% with credit markets on the whole benefiting from further support.
The meeting of Donald Trump and Xi-Jinping proved ameliorating with a temporary trade-war truce and agreement to resume talks. Perhaps Trump is looking for the best compromise of economic status-quo and brinkmanship that will play best in voters’ eyes as we get closer to the 2020 presidential elections and his very real possibility of a second term. But the boost to equity markets was dampened by a slew of weak data across major economies.
Markets continued to decipher the latest perspective of the Fed, following the previous week’s FOMC decision to keep rates on hold. Although markets are now fully expectant of a 25 basis point cut in rates at the 31 July meeting, Fed Chair Jerome Powell’s speech shed some light on the divergent views within the FOMC whilst imploring markets not to overreact to the latest weak data. James Bullard of the St Louis Fed, who dissented at the last meeting in calling for a rate cut, also shared his expectation that US growth has slowed to below 2% but that a quarter-point cut would be sufficient “insurance”. Still further, Neel Kashkari (non-voting this year) President of the Minneapolis Fed is calling for a half-percentage point rate cut with a further commitment to “not raising rates from the new lower level until we see core inflation sustainably reach our target.” This dovishness along with the ongoing uncertainty helped push Treasury and broader credit market yields lower.
Looking to the week ahead, on Monday we have manufacturing PMIs across the US, China, Eurozone and UK as well as Japan’s Tankan Manufacturers Index and unemployment figures across the Eurozone. Following on Tuesday are German retail sales, UK construction PMI and RBA’s rate decision. Wednesday’s focus will be on services PMIs across the US, China and UK as well as the US trade balance and the ADP report ahead of NFP. Little data other than Eurozone retail sales on Thursday with US markets closed for Independence Day followed by US non-farm payrolls on Friday.