The Weekly Report

  • Today is what Augusts are meant to be: Anticipation of what’s coming in September but without the hair-on-fire trading of the previous 11 sessions. Real money accounts remain very active, it’s just Treasury trading that has finally taken an afternoon of vacation. More curve steepening today relieves some of the self-imposed pressure that contributed to this week’s volatility. Today’s winner on the curve is the 5-yr. Stocks are taking the opportunity to recover some losses; commodities are quiet as well.
  • The first article captures the important takeaways from the first four days of the week, ones that saw constant crossfire and enough new developments to anchor yields within a narrower range. One bright spot this week is the strength of investment grade credit. As Chris Low points out in Economic Weekly, no one has the capacity for a general credit blowout this year. The cries from Argentina’s creditors are bad enough as it is.
  • Inflation expectations now dominate interest rates. July’s rising core CPI, though, was not able to push inflation expectations higher. Indeed, the price outlook softened 3-8bp this week. One reason is July’s CPI contained enough one-offs to suggest the June/July twin surprises are circumstantial. See Inflation Lab on page 6.
  • Investors have scrambled to sell T-bills and short coupons to the Fed this week, in the first two (of eleven) buyback operations running through the second week of September. At $20 billion/month the purchases will provide some relief to overwhelmed UST traders, but the bigger impact will be to reduce the degree of rich/cheap distortions on the yield curve. A complete look at the NY Fed’s “interim” plan for reinvestment for the balance of 2019.
  • Looking at household leverage, good news from a surge in mortgage originations in the second quarter. Overall growth, however, still lags the quarterly increases in consumer spending. The economy remains strong enough that using debt is a luxury and not a necessity
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