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Fixed Income Market Commentary by Kevin Giddis

December 14, 2018

The Treasury market is trading higher this morning as the concerns about global growth, the strength of the dollar, and the Fed are yet again pushing more assets to the safer government debt. While the U.S. economy is considered “best of class” of the world’s economies, it too is beginning to weaken. Each number that is released seems to be lower than the previous number. Today we got Retail Sales for November which rose 0.2% as a headline number and up 0.2% when you removed the autos component. The previous month these numbers, after the most recent revisions, were up 1.1% and 1.0%, respectively. Those numbers on their own aren’t necessarily a big deal, but the developing pattern could be. On top of that, if economies across the globe are slowing at a greater pace, then to whom are we going to export? Keep piling on a trade war and additional tariffs, and there you have it: a global economic slowdown with legs! This, in turn, is having an effect on the dollar, which is making the global story worse and squeezing those countries that borrow in dollars, specifically emerging market debt. On the flip side of that argument is Industrial Production which rose 0.6% in November after falling 0.2% the previous month. Capacity Utilization for the same period came in slightly higher at 78.5%. Now we can argue which economic numbers are leading or lagging, but you can’t argue that the U.S. economy is going through “the change.” That takes us to the Fed. If there was a bigger FOMC for the future of both the bond and stock markets, I can’t remember when that was. The Fed is truly at an “inflection point” when it comes to its monetary policy, and it will take both a move and a message to restore calm in the valley. If I had to guess, the markets are looking for the Fed to raise rates, primarily the Fed Funds rate, and then offer a very dovish message for the future. In other words, I would expect them to suggest that the next rate hike, if at all, won’t likely occur until March. That would likely give the markets some breathing room to concentrate on trade, global growth away from the U.S. and the dollar. What that means for rates is that they will probably stay low, with the highs of the year well in the rearview mirror. For those that still expect a 3.75% 10-year note or 3 or more Fed rate hikes in 2019, what color is the sky you are looking at? Unless we see a surge in inflation, which is usually a bi-product of economic growth, we aren’t likely to see long rates move higher. Heck, we are now more worried about an inverted curve and what could come from that vs. too much growth and heaven forbid, higher prices! Don’t forget, over here on the side is complete turmoil in Washington, there is Brexit, credit spreads, and several other geo risks that don’t favor economic growth. Having said that, enjoy your weekend!

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