Weekly Economic Update: April 15th, 2019
• Yields bounced last week with two-year Treasury notes rising seven basis points from 2.33 to 2.40. The move in yields back up to the 2.40 area is important as this is the level achieved on the two-year note after the steep decline in January. The two-year note yield hit a low in 2019 of 2.20 on March 27, just after the release of the Fed’s statements on lowering their projections of future Fed Fund levels.
• Global economic conditions are slowly improving with China experiencing improvements in exports while a trade deal seems to be gaining more traction. The rise in yields since the March 27 lows is the market adjusting to less fear of an economic collapse and an imminent Fed easing. The odds of a decline in the Fed Funds level during 2019 has dropped to 40% from over 50% just a few weeks ago.
• The yield curve is also displaying the belief that economic data is starting to firm with the three months to 10-year curve rebounding from an inversion back to a positively sloped relationship. The curve moved into an inverted position following the Fed’s meeting in March and is now back to a positive 12 basis points.
• Inflation continues to be the Fed’s and the market’s most focused data point. Core CPI inflation has declined from 2.2% in January to 2% in March. The 2% level is consistent with the Fed’s target and will need to move higher to spark any talk of additional Fed tightening in 2019.