Weekly Economic Update: June 10th, 2019
• Short Treasury yields continued to decline last week on the growing perceptions of a Fed ease coming as soon as the July 30-31 FOMC meeting. Two-year Treasury note yields declined eight basis points to a yield of 1.86% while the five-year Treasury note declined six basis points to a yield of 1.85%.
• Trade tensions are intensifying, the positive contribution of the 2017 tax cuts are waning, the growth in manufacturing is weakening, and most importantly inflation is failing to gain the traction it needs to reach the Fed’s target of 2% any time soon. Countering the slowing growth of the economy is the strength in employment. Last month’s weaker than expected employment data continued to boast an unemployment level that is near fifty-year lows.
• The fixed income market has factored in the weakening economic data and the Fed’s perceived change in posture. The market’s discounting process is pricing in two and one-half cuts this year. One-year bills are trading 50 basis points less than the fed funds rate which doesn’t provide much of a premium to the outside possibility that the Fed cuts less than twice in 2019.
• Diversification of maturities is always imperative in fixed income management and becomes even more important as uncertainties rise for the direction of interest rates. The markets have now entered one of their most uncertain periods since the beginning of the tightening cycle nearly four years ago.