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Fixed Income Market Commentary by Kevin Giddis

January 15, 2019

The Treasury market is trading higher this morning as each day the government is shutdown, the economy suffers. This “death by a thousand cuts” is beginning to weigh in on where investors willing to put their money. The case for even more economic weakness is currently being made not only in the numbers, but the lack of inflation as well. Last Friday, the Consumer Price Index for December fell 0.1% as a headline number and up 0.2% as a core number. Today we got the Producer Price Index for the same period and it came in at down 0.2% as a headline number and down 0.1% as a core number. In the absence of very strong economic growth, inflation, no trade deal with China and the shutdown of the U.S. government, how can you avoid looking at fixed coupon trade, with or without risk? This is certainly evident in the Fed Funds futures Probability Index as well. Last week there was a 20% chance that the Fed would raise rates in June, now it’s 15%. At the same time, the further out you go in the year, the greater the chance that the next move by the FOMC is to CUT rates. In fact the Probability Index suggests that there is an almost 30% chance that the Fed will LOWER rates in January of 2020. This isn’t an exact science and things could change, but the market is starting to believe that the “salad days” for the U.S. economy and inflation are in the rearview mirror. That takes us to the Fed. Almost all of the regional presidents are speaking or have spoken over the last week or so and almost to a person, they are making adjustments in not only their outlook for the economy, but for interest rates as well. One thing to keep in mind is that there is a big difference between a downturn and a recession. The formula for a recession isn’t present at this time, but a downturn could be blooming soon. For the balance of the week, look for the market to vacillate back and forth, starving for information, waiting for something “breaking” either in their favor or giving them a reason to do something other than watch.

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