The Treasury market is trading lower this morning as investors take a bit off the table as the week progresses, the 5-year auction approaches, and comments by the Treasury Secretary give hope to a possible trade deal. He said that we were “90% the way there” when speaking about the previous U.S.-China trade deal, which pushed equity futures higher and bond prices lower. How this actually plays out is anyone’s guess, but you get a glimpse of the volatility that exists in today’s markets as well as the sensitivity. Today the Treasury will sell $41 billion of 5-year notes. This could prove to be a challenge for both the Treasury and the market because you need to convince investors that taking a 5-year Treasury at a 3 basis point give-up to the 2-year note is sound investment thinking. On the economic front, we will get Durable Goods Orders for the month of May, which are expected to fall 0.3%, but rise 0.1% when you remove the volatile Transportation Orders. None of this is going to ignite the market in either direction, especially coming off of Chairman Powell’s speech to the Council for Foreign Relations yesterday. He set the tone to build consensus for a future rate cut, if warranted, at a time that the Committee deems appropriate. His speech was designed to give support to the FOMC as a “non-political” being, while addressing when a potential rate cut should occur. This made the equity market nervous because while the bond market is predicting a rate cut by the Fed, the equity market appears to be counting on it. Bonds have tended to see this as an inflation event, with a rate cut the cherry on top. On the flip side, if we get a trade deal, bonds could sell-off hard, and stocks would likely rally, with or without a cut by the Fed. My point is that each market is cheering for different things, with different weightings, and different potential outcomes. However we look at it, this week and next week will be key to the future of near-term trading, with progress on a trade deal the most important component for each market. If the G20 disappoints, then we will likely pivot back to the Fed and the economic data.
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