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  • US/Chinese trade war worsens as China raises doubts about whether the trade talks will resume
  • 10-year T-note yield plummets to 1-1/2 year low
  • UK Prime Minister race begins as May announces her resignation schedule today
  • Markets fear populist success in Sunday's EU elections
  • Durable goods orders expected to be weak
 

US/Chinese trade war worsens as China raises doubts about whether the trade talks will resume -- China in the past 1-1/2 weeks has clearly been dragging its feet on restarting trade talks considering that no date has yet been set for Lighthizer/Mnuchin to travel to China for a new round of talks.  In addition, there has been no official confirmation that Presidents Trump and Xi will even meet in Japan during the G20 Summit on June 28-29.

Chinese officials yesterday made their hesitancy clear in a state-run newspaper commentary that said the talks will only resume if the Trump administration shows "sincerity and corrects "their wrong actions," adding "Negotiations can only continue on the basis of equality and mutual respect."

The U.S. stock market on Thursday sold off sharply after China's threat not to return to talks.  China for the time being is standing up to both President Trump's threat to slap a 25% tariff on another $300 billion of Chinese goods as soon as mid to late June and to the Trump administration's move late last week to impose a trade blacklist on Huawei Technologies.

The only good news on Thursday was that Mr. Trump said later in the day that Huawei could be included in a trade deal, suggesting that the U.S. might back off on its aggressive actions on technology in exchange for trade concessions.  Mr. Trump therefore offered at least a small olive branch, although it was unclear whether that olive branch was directed more at the U.S. stock market than China.

The markets in the past two weeks have become very concerned about the Trump administration's broad technology offensive against China by blacklisting Huawei, threatening to blacklist five top Chinese surveillance equipment/software companies, and suggesting yesterday that general U.S. export rules will be tightened for a broad range of technology products.

All hopes continue to lie with a possible meeting in late June between Presidents Trump and Xi in Japan at the G-20 meeting.  At this point, the two Presidents are the only ones who can decide whether they want to return to talks and whether there is any hope for an eventual trade deal.  If Mr. Trump goes through with the 25% tariff and continues the new tech offensive, then the hopes for a deal during the Trump presidency will quickly fade.  China is already battening down the hatches for a long slog.

10-year T-note yield plummets to 1-1/2 year low -- The 10-year T-note yield on Thursday fell to a new 1-1/2 year low of 2.29% and closed the day down -6 bp at 2.32%.  The 10-year yield has now plunged by a total of -97 bp from last October's 8-year high of 3.26%.  

Yesterday's -6 bp drop in the 10-year T-note yield was due to (1) the stock market sell-off that boosted flight-to-quality demand for T-notes, (2) the worsening US/Chinese trade war that is expanding into a tech war as well, (3) yesterday's sharp -2.0 point decline in the U.S. May Markit manufacturing PMI to 50.6, the lowest level in at least 8 years, (4) yesterday's -5.1 bp plunge in the 10-year breakeven inflation expectations rate to a 4-3/4 month low of 1.76% that resulted in part from yesterday's -5.71% plunge in July WTI crude oil prices.

T-note prices on Thursday were also boosted by the very sharp -14 bp drop in the Dec 2020 federal funds futures contract (on a yield basis) to 1.695%, which boosted market expectations for Fed easing through 2020 to 65.5 bp (i.e., 2.6 rate cuts) from 51.5 bp on Wednesday.

 

 

UK Prime Minister race begins as May announces her resignation schedule today -- Prime Minister today will announce a timetable for her resignation.  Bloomberg reports that her actual resignation date will be June 10, after President Trump's visit to Britain.  Ms. May intends to stay on as the caretaker prime minister during the period of about 6 weeks that it will take for the Conservative Party to choose a new leader.

Ms. May's latest Brexit proposal, which she hoped to put to a vote in early June, is now dead.  The Brexit process is now on hold while the Conservative Party chooses its next leader.  Boris Johnson is the odds-on favorite to become the new Prime Minister with betting odds of 55%, according to PredictIt.org.  Regardless of whether Mr. Johnson wins the leadership, the new Conservative Party leader will undoubtedly be strongly in favor of Brexit and will execute the break as quickly as possible.  That substantially increases the chances for a no-deal Brexit because the EU insists there will be no better transition deal than it offered to Ms. May.

Markets fear populist success in Sunday's EU elections - Most EU countries will hold their elections for the European Parliament on Sunday and the results will start emerging on Sunday night.  The UK held its vote yesterday but the results will not be available until Sunday.  The euro and European stocks will be vulnerable if the various euroskeptic parties do better than expected in Sunday's election.

Durable goods orders expected to be weak -- The consensus is for an Apr durable goods orders report today of -2.0% and +0.1% ex-transportation, weaker than March's report of +2.6% and +0.3% ex-transportation.  The markets are worried that companies are reducing orders due to trade tensions.  Yesterday's sharp -2.0 point drop in the Markit U.S. manufacturing PMI to 50.6, the lowest level in more than 8 years, was particularly disconcerting as a sign of a slowing U.S. manufacturing sector.

 

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