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July 2019 Economic Review

Losing Patience

U.S. Treasury yields collapsed in June as mounting global concerns significantly increased the likelihood of a rate cut from the Federal Reserve in July. The threat of escalating tariffs on U.S. trading partners has placed additional stress on a global economy saddled with plummeting inflation expectations, aging demographics, and weakening productivity. Market indicators project roughly one in three odds that the U.S. economy will enter a recession within the next 12 months.

The Federal Reserve, facing intense scrutiny from President Trump to cut rates in June, dropped its pledge to be “patient” in regard to future rate adjustments in favor of “closely monitoring the implications of incoming information.” While many Fed participants now anticipate 25 to 50 basis points of rate cuts over the next two years, this is markedly less than what markets have started to price in.

The much-anticipated June G20 summit meeting between President Trump and China’s Xi Jinping created many headlines while providing few results. Essentially, both sides agreed to more discussions with a final resolution nowhere in sight. Although the de-escalation in trade tensions temporarily put the market at ease, many realize this could all unravel with one sour tweet. With an unpredictable and wide range of possible outcomes, the trade issue will likely impair business investment and global growth for the foreseeable future.

Given this backdrop, consumer spending is poised to be the predominant driver of growth over the medium-term. The labor market, while admittedly choppy on a month-to-month basis, continues to show no sign of recession. The Fed projects the U.S. to grow roughly 2% for the next few years. Despite this forecast weakness in global growth, trade risks and middling inflation will likely persuade the Fed to cut rates this year.

Treasury Yields
Maturity 7/1/19 6/1/19 Change
3-Month 2.109% 2.340% -0.231%
6-Month 2.087% 2.345% -0.257%
1-Year 1.930% 2.200% -0.270%
2-Year  1.787% 1.922% -0.135%
3-Year  1.739% 1.873% -0.134%
5-Year 1.789% 1.911% -0.122%
10-Year  2.024% 2.125% -0.101%
30-Year  2.548% 2.569% -0.021%

Agency Yields
Maturity 7/1/19 6/1/19 Change
3-Month 2.201% 2.351% -0.150%
6-Month 2.225% 2.390% -0.165%
1-Year 2.199% 2.395% -0.196%
2-Year  1.877% 2.022% -0.145%
3-Year  1.834% 1.964% -0.130%
5-Year  1.898% 2.028% -0.130%
Commercial Paper Yields (A-1/P-1)
Maturity 7/1/19 6/1/19 Change
1-Month 2.340% 2.420% -0.080%
3-Month 2.280% 2.480% -0.200%
6-Month  2.160% 2.470% -0.310%
9-Month 2.130% 2.480% -0.350%
Current Economic Releases
Data Period Value
GDP QoQ Q1 ’19 3.10%
U.S. Unemployment    June ’19 3.70%
ISM Manufacturing    June ’19 51.70
PPI YoY    May ’19 1.00%
CPI YoY   May ’19 1.80%
Fed Funds Target   July 2, 2019 2.25% – 2.50%

Source: Bloomberg
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