The combination of easing trading tensions, stronger U.S. economic data, and speculation of a hawkish shift from the Bank of Japan (BOJ) contributed to a steeper Treasury curve toward the end of July.
- A positive meeting between Trump and Juncker temporarily eased trade concerns from a market perspective.
- Q2 GDP growth breached 4% for the first time since 2014, and the underlying details were positive for current quarter production.
- Higher mortgage rates appear to be weighing on U.S. housing demand.
The BOJ announced on July 31 that it would not be increasing its target yields for Japanese government bonds for the foreseeable future. Rather, it would double the allowable deviation from the target yields from 10 basis points (bps) to 20 bps. For example, the BOJ has a target 10-year yield of 0%, and previously it would allow market yields to fluctuate from -0.10% to 0.10% before intervening and purchasing bonds. The 0% target has not changed, but the central bank will now allow 10-year yields to rise to as high as 0.20%. Such an increase could make domestic yields look more attractive to Japanese investors on a currency-adjusted basis, which would be expected to impact demand in other developed markets as well (specifically Europe and the United States). ContentMiddleAd
On the trade front, market concerns were lessened following the meeting between President Trump and European Union Commission President Juncker on July 25 to discuss trade relations. While no formal agreements were reached, both parties agreed to good-faith negotiations for freer trade, and so long as those negotiations continue, no new tariffs will be announced. While this positive result alleviated an immediate concern, trade tensions with China remain, and there’s a reasonable risk that President Trump changes his mind on the European truce.
This market overview is provided by ALM First Financial Advisors, LLC, the investment advisor for Trust for Credit Unions.Read more from ALM First about the latest economic data releases and overall market trends at Trustcu.com.