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Trump's Fed Rate-Hike Fears Steepen Yield Curve to 3-Week High

Trump's Fed Rate-Hike Fears Steepen Yield Curve to 3-Week High
(Dana Rothstein/Dreamstime)

Friday, 20 July 2018 05:36 PM

The U.S. yield curve reached its steepest level in more than three weeks on Friday afternoon as President Donald Trump criticized the speed of the Federal Reserve's pace of rate hikes.

The long end of the curve, which reflects sentiment about rising inflation and the health of the economy, moved higher while short-dated maturities held steady. Trump is concerned the central bank will raise interest rates another two times this year, a White House official told CNBC.

Earlier on Friday Trump questioned the Fed's expected pace of hikes in posts on Twitter, saying it takes away from the United States' "big competitive edge" and could hurt the U.S. economy. Trump also criticized Fed policy in an interview on CNBC on Thursday.

The prospect that Trump's comments will encourage Fed Chair Jerome Powell to slow the pace of hikes this year pushed yields on longer-dated Treasury bonds up. The 30-year Treasury bond yield was up 6.6 basis points from Thursday's close to a session high of 3.03 percent.

The yield on the benchmark 10-year note was as high as 2.90 percent, up 5 basis points from its last close. At the short end of the curve, the two-year note yield increased by 1.2 basis points from Thursday's close at 2.60 percent.

"We have above full employment, and if Trump is successful in getting the Fed to back off its rate hikes, that has the potential to create an overheating economy and rising inflation," said Mary Ann Hurley, vice president in fixed income at D.A. Davidson in Seattle.

The spread between the five- and 30-year Treasury yield rose by 4.9 basis points to a session high of 27.2 basis points on Friday, with the spread between two- and 10-year yields up by as much as 5.5 basis points to 29.8. In spite of the curve steepening, the futures market implied traders' expectations the Federal Open Market Committee will raise rates at its Sept. 26 meeting were little moved, CME Group's FedWatch program showed.

The probability of a fourth rate hike in December rose from 53.69 percent on Thursday to 55.59 percent on Friday. "We're almost at the point where we've priced in two hikes fully," said Bruno Braizinha, interest rates strategist at Societe Generale in New York.

He said that may suggest that the curve had, before Thursday, flattened nearly as far as it could go absent economic news. No significant U.S. economic data was published on Friday.

Meanwhile, U.S. stocks ended slightly lower on Friday as escalating trade anxieties driven by Trump’s latest tariff threats against China offset a string of robust earnings led by Microsoft. 

The Dow Jones Industrial Average posted its third consecutive weekly gain, while the S&P 500 also rose for a third straight week after eking out a gain for the period.

Shares of Microsoft Corp (MSFT.O) hit a record high and ended the session up 1.8 percent on the heels of a strong second-quarter earnings beat. The company narrowed the race with Apple Inc (AAPL.O) and Amazon.com (AMZN.O) in the race to be worth $1 trillion in market value.

Microsoft’s advance provided the biggest support to the S&P 500 and the Nasdaq.

Trump said he was ready to impose tariffs on all $500 billion of Chinese imports, the latest salvo in a series of protectionist moves that have prompted retaliatory measures from U.S. trading partners around the world.

“I think there’s a divided line on the Street,” said Robert Pavlik, chief investment strategist at SlateStone Wealth LLC in New York. “One side believes that (the trade dispute) is only going to lead to a global recession, where the other side believes that the president is trying to get the other side to negotiate.”

Trump also repeated his criticism of planned interest rate hikes by the Federal Reserve, writing in a Twitter post that tightening U.S. monetary policy would diminish any U.S. trade advantage.

Long-dated U.S. government bond yields rose on worries that the president’s comments would encourage Fed Chairman Jerome Powell to slow the pace of rate hikes by the U.S. central bank, which could increase inflationary pressure.

“The president can’t control interest rates,” Pavlik said. “He’s not a king. So I think the Street’s reaction to that is a major overreaction.”

As the second-quarter reporting season picks up steam, analyst forecasts have grown rosier. Earnings for S&P 500 companies are now estimated to have grown 22.0 percent in the quarter, compared with the 20.7 percent seen on July 1, according to Thomson Reuters I/B/E/S.

So far, 87 companies of the S&P 500 have posted results, of which 83.9 percent have beat consensus estimates.

The Dow Jones Industrial Average fell 6.38 points, or 0.03 percent, to 25,058.12, the S&P 500 lost 2.66 points, or 0.09 percent, to 2,801.83 and the Nasdaq Composite dropped 5.10 points, or 0.07 percent, to 7,820.20.

Diversified manufacturer Honeywell International Inc’s (HON.N) stock rose 3.8 percent after its earnings beat expectations and the company raised its profit forecast.

General Electric Co (GE.N) dropped 4.4 percent, the biggest drag on the S&P 500, after the conglomerate reported a smaller-than-expected drop in quarterly profit but trimmed its cash flow target.

Declining issues outnumbered advancing ones on the NYSE by a 1.12-to-1 ratio; on the Nasdaq, a 1.11-to-1 ratio favored decliners.

The S&P 500 posted 21 new 52-week highs and two new lows; the Nasdaq Composite recorded 109 new highs and 38 new lows.

Volume on U.S. exchanges was 6.00 billion shares, compared with the 6.42 billion-share average for the full session over the last 20 trading days.

The U.S. dollar fell the most in three weeks against a basket of six major currencies, halting a rally that had driven the greenback to a year high.

“The dollar is an important issue today especially because we have been on a rise for quite a long time,” said Randy Frederick, vice president of trading and derivatives for Charles Schwab in Austin, Texas.

The dollar index fell 0.77 percent, with the euro up 0.74 percent to $1.1727.

© 2019 Thomson/Reuters. All rights reserved.

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The U.S. yield curve reached its steepest level in more than three weeks on Friday afternoon as President Donald Trump criticized the speed of the Federal Reserve's pace of rate hikes.
trump, fed, rate, hike, yield, curve
Friday, 20 July 2018 05:36 PM
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