The past week brought its fair share of drama.
Although equity and Treasury markets exhibited signs of nervousness, volatility actually subsided.
Trade wars between the U.S. and other countries continued to dominate the headlines. But these disputes haven’t moved markets all that much.
Global economic growth may slow because of diminished trade, the International Monetary Fund (IMF) warned last week.
Commodity prices, especially oil, dropped in response to the potential for weaker-than-expected economic growth.
Action in the Treasury market suggested that investors remain cautious. Volatility was relatively muted in this asset class, at least until Friday.
Thirty-year Treasury bonds yielded less than 3% for over three weeks, fluctuating between 2.93% and 2.98%. That’s despite inflation creeping higher.
Friday’s move broke through resistance, and Monday’s follow-through propelled yields beyond 3%. Hello, volatility.
Russia Dumped, China Backed Up the Truck
Last week, the Treasury Department released a monthly report indicating that Russia’s holdings of U.S. government debt fell below $15 billion in May.
This sell-down occurred quickly. Russia held over $96 billion worth of Treasuries two months ago.
In hindsight, Russia’s rush for the exits may have contributed to 30-year yields spiking to 3.24% in May.
The same report showed that foreign individuals more than made up for central bank selling in May. These market participants added $26.7 billion in Treasury securities.
Meanwhile, despite China’s burgeoning trade dispute with the U.S., the country was a net buyer of Treasury securities.
China added $1 billion worth of Treasuries to its hoard in May, bringing the total to $1.183 trillion.
If Russia dumping roughly $80 billion worth of Treasury bonds drove yields significantly higher in May, imagine what would happen if China decided to pare its exposure dramatically.
It’s not a pretty thought.
I hope the Trump administration considers that potential nuclear weapon as the trade war heats up.
We’ll continue to monitor the Treasury Department’s news releases for any changes in China’s appetite for U.S. government debt, though this data does involve a two-month lag.
Back in the U.S.A.
June retail sales came out last Monday morning and met expectations for a monthly increase of 0.5%. Core sales, which exclude autos and gas, disappointed, increasing by only 0.3%.
The real action occurred in the May figures, as the Commerce Department revised the headline and core numbers higher by about two-thirds.
In June, gas, auto, restaurant, and personal care sales were points of strength. Categories that suffered sharp sales declines included department stores, clothing, and electronics.
Federal Reserve Chair Jerome Powell testified before Senate and House committees last week and, once again, expressed concerns about low inflation and wages.
Housing data released last Thursday revealed a sharp decline in starts and permits.
Remember, starts and permits give us a preview of future new-home sales because builders don’t usually start construction until they’re confident that the finished product will sell.
Starts fell 12.3% in June, while permits tumbled 2.2%. The only good news was that single-family starts were up 0.8%, rebounding from a 2.3% decline in May.
One bad month doesn’t make a trend or mean that housing has reversed.
New-home sales are important to the economy because of the “ripple effect” they produce.
Think of all the things it takes to make a new house a home: furniture, appliances, decorations, and landscaping spring to mind. All these businesses benefit from the sale of a new home.
Sales of existing homes had been relatively flat, before diving 0.6% sequentially in June and 2.2% year over year. This weakness could prove to be an early warning about the housing sector.
That’s the third month in a row where sales fell short of expectations.
If next week’s new-home sales come in light, markets could react.
All this adds up to continued volatility in Treasury markets, so be ready for the next trading opportunity!
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Happy trading to you,