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U.S. Treasury yields edged lower on Wednesday, on pace for a second day of declines, as investors doubted the newly signed U.S.-China trade pact would significantly stoke the American economy this year.
On Tuesday, yields were pushed lower following subdued readings on U.S. consumer inflation and small-business sentiment which were followed up Wednesday with mixed economic data.
What are major indexes doing?
The yield on the 10-year U.S. Treasury note TMUBMUSD10Y, -1.30% fell 2.5 basis points to 1.792%, while the 2-year Treasury yield TMUBMUSD02Y, -0.27% edged 1.4 basis points lower to 1.564%.
The 30-year Treasury bond yield TMUBMUSD30Y, -1.14%, also known as the long bond, shed 2.7 basis points at 2.248%.
What’s driving the market?
China-U.S. trade relations were on the front of investors’ minds Wednesday. The signing of a preliminary agreement between the two superpowers represents a detente in a trade war that has rattled global markets and businesses for nearly two years. However, questions remain about details, including how Beijing and Washington will tackle issues that include Chinese subsidies to domestic companies and intellectual property theft via entities like Huawei Technologies.
While the deal will roll back some tariffs of Chinese goods, it also keeps tariffs in place on and estimated $360 billion of Chinese imports, leading some economists to call high tariffs between Washington and Beijing the “new normal.”
Check out: Here’s the full text of the U.S. and China’s ‘phase one’ trade deal
Meanwhile, in U.S. economic data, producer price inflation remained muted. Wholesale prices inched up 0.1% last month, the government said Wednesday. Economists polled by MarketWatch had predicted a 0.2% increase. Wholesale inflation rose just 1.3% last year, half as much as it did in 2018. Inflation has tapered off since the summer and shows little sign of acceleration.
The PPI report follows Tuesday’s muted reading of U.S. consumer price inflation with only a 0.2% rise in prices in December, and with core prices stripped out of volatile food and energy prices, it increased by a slight 0.1%, below the 0.2% expected.
“The disappointing PPI data, along with the weak CPI report released earlier this week, underscore that price pressures remain extremely tame,” wrote a team of economists at Oxford Economics led by Lydia Boussour on Wednesday.
“Looking ahead, we see the ongoing inflation undershoot persisting just as GDP growth falls below potential, prompting the Fed to cut rates once more in June.”
The Federal Reserve Chairman Jerome Powell signaled in December that the central bank would hold interest rates at a 1.5% to 1.75% target range throughout 2020, unless there is meaningful deterioration in the economy.
Separately, on Wednesday, the New York Federal Reserve’s Empire State business conditions index rose a modest 1.5 points to 4.8 in January, the regional Fed bank said Wednesday. Economists had expected a reading of 3.6, according to a survey by Econoday. Any reading above zero indicates improving conditions.
An account of business conditions in the Fed’s regional districts, known as the Beige Book, showed the U.S. economy saw modest expansion over the last six weeks of 2019, driven in large part by consumer spending.
Elsewhere, economic growth in Germany slumped to a six-year low in 2019, underscoring the vulnerability of Europe’s export powerhouse to tensions in the global economy. Germany’s 10-year government debt was at negative 0.200%, TMBMKDE-10Y, -16.64% compared with negative 0.167% a day ago.
Italy on Wednesday joined a rush of euro zone governments to issue debt, with orders topping more than 44 billion euros for the 30-year Italian debt offering, according to Reuters.. 30-year Italian debt TMBMKIT-30Y, -0.63% was yielding 2.438%, compared with 2.458% on Tuesday.
What do market participants say?
“Effectively, the signing was very much built into valuations and why we sit where we do today,” Mark Heppenstall, chief investment officer at Penn Mutual Asset Management, told MarketWatch.
“It doesn’t feel like economic growth is strong enough to see a meaningful spike in inflation,” he said, adding that chances are that interests rates follow the Fed’s lead and “are more likely to remain range bound than they have been in the previous two years.”
