Source: US Dept. of Treasury End of Day
• Interest rates fell significantly last week as pressure on the Fed to cut rates intensified with an economy weakening more than expected and inflation persisting well under the Fed’s target of 2% as measured by Core PCE. The two-year Treasury yield declined 22 basis points to 1.94%, and the five-year note fell 21 basis points to 2.13%. The yields on short treasury notes are now trading at levels not seen since January of 2018 when fed funds were trading at 1.50% or a full 100 basis points lower than today’s fed funds target
• Consumer spending stagnated in April, following an outsized increase in March. Other economic data points are also coming in below expectations, causing widespread cutbacks in second-quarter growth estimates. 2Q 2019 GDP is now projected to fall somewhere between 1.0%-1.25%, down significantly from the 3.2% growth recorded in Q1 2019.
• The yield curve is projecting increased odds of a coming recession with the closely watched three month Treasury bill now trading 23 basis points higher than the ten year Treasury note. This is the 7th day of the yield relationship becoming inverted. Historically, a recession has followed on average 311 days after the three months/ten-year inversion occurs for ten days in a row.
• The Fed remains steadfast for now, but if trade tensions escalate and the White House follows through with its latest tariff threat against Mexico, the odds of a rate cut – and a possible recession – will increase exponentially. The odds of a Fed rate cut by September has now exceeded 90%.
