Stocks Like Trade Deal, Bonds Not So Much

Stocks and Mortgage Bonds are both higher so far this morning.

Yesterday, Stocks rallied and Bonds sold off after the UK trade deal was announced and there was a weak 30-year Treasury Bond Auction.

The trade deal with the UK kept the 10% tariffs in place, but lowered the all-in tariff against the US from 5.3% to 1.8%. It was friendlier to our farmers and will make it easier for us to export those goods to the UK. There is still a lot of things to figure out, but it seems like the US put together a good deal.

Additionally, we made some concessions on certain sectors. Autos from the UK will have a 10% tariff instead of 25% (up to 100K cars, but that covers most), and the steel tariff was reduced from 25% to 0%...but it’s not a significant amount.

As a result of the deal, risk on assets rallied. The next big talks are this weekend with China. Trump posted yesterday saying that 80% tariffs felt right, dropping them from 145%...but anything above 50% really just halts trade each way. It’s unclear if this is just a negotiation tactic or what, but we do think there is a chance some type of deal or progress is made this weekend, which could weigh on the Bond market further and is something we need to be prepared for.

NY Fed Consumer Expectations Survey

There are more signs that the economy is slowing and that the consumer is feeling the pinch. The NY Fed Consumer Expectations Survey was released yesterday and showed that consumers are expecting higher inflation, lower incomes, and a higher unemployment rate.

Income expectations were the weakest since April 2021, and those feeling better about their financial situation vs a year ago fell, while those feeling worse about their financial situation vs a year ago rose.

Unemployment expectations rose to the highest since April 2020, which was right around the Covid lockdowns. It seems that ADP, JOLTS, and every survey/report are showing weakness in the labor market, but you wouldn’t know it looking at the latest BLS Jobs Report. But we know that report will get revised significantly lower…it’s just a matter of time. This is something the Fed should be thinking about, but based on their last meeting, they think there is no risk to waiting and no need to be preemptive in their cuts.

News Next Week

Tuesday: Consumer Price Index, NFIB Small Business Optimism Index

Wednesday: Mortgage Apps

Thursday: Producer Price Index, Retail Sales, Initial Jobless Claims, Industrial Production, NAHB Housing Market Index

Friday: Housing Starts and Permits, Foreign Bond Investment Announcement

Technical Analysis

Mortgage Bonds broke beneath their 100-day Moving Average and once again tested support at 100.86, which is a level that was tested and held four out of the last five days, including today thus far. Bonds are moving higher from that floor, but are being squeezed in a narrow range and are right up against the 100-day Moving Average. If support is broken, there is 26bp of room to the downside until the next level of support.

The 10-year is trading just beneath the 100-day Moving Average and falling trend line from the beginning of the year. Thus far those levels are holding and there is room for yields to improve until reaching 4.33%.

With that being said, the big headline risk this weekend is progress on a trade deal with China. We saw how Bonds reacted after the announcement with the UK…if there are positive outcomes from the meeting with China, it will likely cause Stocks to rally and Bonds to selloff.