The Treasury market is trading lower this morning as traders prepare for what could be an “Employment Report” styled anticipation of what Chairman Powell says to Congress when he testifies beginning tomorrow. So far, the FOMC has made it quite clear of their intentions to tighten, but since then we have had a trade war, continued low wage inflation, and some suspect growth numbers. His testimony could set the stage for how the Fed’s timeline compares to the market’s timeline, which is likely going to determine price/yield levels for the next few months. Retail Sales for June were released today and showed a bit of softness (up 0.5% as a headline number and up 0.4% ex. autos), but still shows an economy that is growing at a pretty nice pace. Business Inventories were steady in May at up 0.4%. While we will get numbers like Industrial Production, Capacity Utilization and Housing Starts, the focus for the market will be squarely on what clues Chairman Powell will give the market…if any. Right now, the Fed Funds futures Probability Index suggests that there is a strong chance that we will see the FOMC raise rates at the September 26th meeting and possibly the December 19th meeting, skipping the August 1st and November 8th meetings. We are already beginning to see the bond market drop back a bit on price, but nowhere near where economists and market observers thought we would be at this point of the year. Many expected the 10-year to be north of 3% now and that has caused investors to play this one closer to the vest. What makes all of this so interesting is that Europe is finding economic growth tougher than they thought and wage advances haven’t really kept up with inflation, so disposable income hasn’t moved all that much. This has been a corporate led recovery, and companies appear to be enjoying this by returning money to shareholders vs. paying it out to their employees. That lag in wage growth is why yields have not moved upwards as so many had predicted.
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