The combination of dovish central bank postures, amplified trade tensions, and softer economic data sent global rates tumbling last week. The US 2-Year Treasury yield fell 9 basis points (bps) to 1.85%, a level not seen since 2017, while the 10-Year yield fell 6 bps. Rallies in Europe were stronger still, with yields on the German 10-Year Bund and UK 10-Year Gilt falling 8 bps and 6 bps, respectively. At this point, the stock market and the bond market have priced in multiple interest-rate cuts from the Federal Reserve this year and next.
Not to mention that the New York Fed’s Manufacturing Index number from Monday morning gave Fed Chairman Powell all the cover he needs to get the President off his back this Wednesday. The Empire State manufacturing index plummeted 26.4 points to negative 8.6 in June, its largest monthly decline on record. It’s now back to pre-election levels, when a different kind of “uncertainty” gripped corporate America...
Chart from Twitter, @NewYorkFed; June 17, 2019.
In our view, it seems likely that the Fed will hold off lowering rates until after the G20 summit, where there might be progress on trade talks between the US and China. However, with data like this from the New York Fed and folks like Jeff Gundlach over at Doubleline Capital claiming a 65% likelihood of recession within the next year, we expect those cuts are coming. …And they’ll probably be with a chainsaw.
This week, though, expect a short statement from Powell and a very short Q&A; look for the Fed to basically put the ball on the tee here for a rate cut on July 31st.
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