The yield on the 10-year Treasury hit 1.75% this week - its lowest level since November 2016 after China countered U.S trade actions. Last week, President Trump announced that the U.S. would impose a 10% tariff on $300 billion worth of Chinese imports, effective Sept 1st. The news pushed the S&P 500 to its worst weekly performance of the year. In response, China allowed the yuan to weaken to its lowest level in more than a decade.
In the July FOMC meeting, the Fed decided to enact the first rate cut in over a decade lowering the fed funds rate a quarter percent citing the ongoing U.S. China trade conflict. Two regional Federal Reserve presidents publicly dissented with the decision to cut rates citing that economic conditions didn’t warrant easing. The Fed did leave the door open for further rate cuts, while also suggesting that it has not entered an extended period of lowering rates. Chairman Powell described the cut as a more technical “mid-cycle adjustment” than the beginning of easing of monetary policy. President Trump was expecting a more dovish tone from the Fed and was quoted saying “Chairman Powell let us down.”
The trade and currency drama has increased expectations of future rate hikes. Fed funds futures are now showing a 100% chance of another rate cut in September up from approximately 55% last week. Currently, expectations show an 82% chance of another 25 bp rate cut with 18% chance of a 50 bp cut. By the end of the year, Fed fund futures are reflecting a 43% chance that the benchmark rate will be in the 1.50-1.75 range implying 2 more rate cuts before the start of 2020.
The U.S. economy gained 164K jobs in July which was right in line with analyst expectations of 165K. Wages increased 0.3% month over which was slightly above expectations and 3.2% year over year. The unemployment rate also remained at 3.7% and the total labor force set a record high of 163.4 million. ISM non-manufacturing disappointed again in July 53.7 vs 55.5 expectations. This was the weakest reading since August 2016.