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Bond Market's Grim Mood Faces a Gut Check From Key U.S. Reports

Bond Market's Grim Mood Faces a Gut Check From Key U.S. Reports

(Bloomberg) -- Treasury bulls are about to get some make-or-break U.S. economic data, after investors’ quest for shelter drove yields to multiyear lows in a sign of growing conviction that a recession is ahead.

Ten-year Treasury yields have tumbled to just below 2.13%, the lowest since 2017, after U.S. President Donald Trump said he’d impose tariffs on all Mexican goods over illegal immigration. Coming on top of escalating U.S.-China trade friction, the latest levy salvo helped 10-year Treasuries post the largest monthly rally since 2015.

Now some pivotal U.S. economic releases -- on manufacturing and employment -- could cement or spoil the bullish narrative. Traders have gotten so gloomy on the growth outlook that they’re betting the Federal Reserve will cut its target rate by a half-percentage point by year-end. That’s further widened the divide between the market and policy makers, who have projected no move in 2019 and a quarter-point hike in 2020.

Bond Market's Grim Mood Faces a Gut Check From Key U.S. Reports

“Either things are slowing down and we’re easing -- in which case we’re going to 1.5% -- or growth is at potential and there are downside risks, but that can keep rates at 2.4%,” said Priya Misra, head of global rates strategy at TD Securities. Monday’s manufacturing gauge is “absolutely critical. If it falls lower, we’ve got more room to go on the rally.”

Haven demand has also pushed the 30-year yield below 2.6%, to the lowest level since around the 2016 U.S. presidential election. In Germany, 10-year bund yields fell to a record low of -0.213%.

Targeting 2.4%

Nevertheless, Misra is targeting a move back to 2.4% on the U.S. 10-year. The note is about 22 basis points below three-month rates, the most since 2007. An inversion of these rates has historically proven a strong signal of looming recession.

ISM manufacturing is forecast at 53 for May, up from a prior reading of 52.8, which was the weakest since 2016. That year was also the last time it was below 50, which would indicate contraction. The June 7 jobs report is expected to confirm that the labor market remains tight, with a 3.6% jobless rate that would still be the lowest since 1969.

“The one thing we were comfortable with up until recently was that the U.S. economy was growing OK,” Misra said. “That assumption is shaken if we get weaker ISM.”

Friday also saw Barclays Plc, JPMorgan Chase & Co. and NatWest Markets update their Fed views to project cuts in 2019. Barclays cited “deteriorating economic and financial conditions” resulting from worsening U.S. trade relations with China and Mexico in its revision, which includes a call for a half-point reduction in September.

NatWest’s John Briggs sees 2% as the next stop on 10-year Treasury yields.

“Why would China give concessions to Trump” when Mexico had a deal and he still threatened tariffs, said Briggs, head of rates strategy for the Americas. “Even if he comes back and doesn’t impose those tariffs, the surprise and the willingness to come out of left field, I think that’s going to linger.”

What to Watch

  • All eyes will be on trade developments. But the week also brings a European Central Bank meeting (no change in policy expected), and U.K. Prime Minister Theresa May’s final days as head of the Conservative Party.
  • Here’s the economic data calendar:
    • June 3: Markit manufacturing PMI; ISM manufacturing; construction spending
    • June 4: Factory/durable goods orders
    • June 5: MBA mortgage applications; ADP employment change; Markit services PMI; ISM non-manufacturing; Fed’s Beige Book
    • June 6: Challenger job cuts; nonfarm productivity; jobless claims; trade balance; Bloomberg consumer comfort
    • June 7: Nonfarm payrolls/unemployment rate; wholesale trade sales/inventories; consumer credit
  • It’s a full slate of Fed speakers, with Chairman Jerome Powell among those appearing at a Fed-sponsored conference in Chicago that’s part of the central bank’s review of monetary-policy strategy, tools and communications practices.
    • June 2: San Francisco Fed’s Mary Daly speaks in Singapore (9:45 p.m. New York time)
    • June 3: Fed Vice Chair for Supervision Randal Quarles discusses Libor transition; Richmond Fed’s Thomas Barkin; St. Louis Fed’s James Bullard
    • June 4: New York Fed’s John Williams; Powell and Governor Lael Brainard speak at Chicago Fed conference
    • June 5: Vice Chairman Richard Clarida at Chicago Fed conference; Governor Michelle Bowman; Atlanta Fed’s Raphael Bostic
    • June 6: Dallas Fed’s Robert Kaplan; New York Fed’s Williams
    • June 7: Daly in Singapore (midnight N.Y. time)
  • Bill auctions are ahead:
    • June 3: $36 billion 3-month bills; $36 billion 6-month bills
    • June 6: 4-, 8-week bills

--With assistance from Elizabeth Stanton and Alexandra Harris.

To contact the reporter on this story: Katherine Greifeld in New York at kgreifeld@bloomberg.net

To contact the editors responsible for this story: Benjamin Purvis at bpurvis@bloomberg.net, Mark Tannenbaum, Nick Baker

©2019 Bloomberg L.P.