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Tensions between the U.S. and China escalated to a new level in May as President You-Know-Who raised tariffs on $200 billion of Chinese imports from 10% to 25%.
The basis for the increase appears to be the result of the Chinese backing away from agreements made in earlier negotiations. In the short-run, the impact of increased tariffs will likely have a larger effect on growth in China rather than in the U.S. Nonetheless, rising prices on imported Chinese goods have the potential to raise costs to consumers in the event businesses decide to pass-through those additional costs. In any event, the trade discussions are likely to continue to be a drag on growth until an acceptable agreement is reached.
Market participants are betting on a rate cut as soon as July with Fed funds futures showing the probability of a rate cut is greater than 80%
With recent Fed speak indicating most members of the Fed are split on the rate cut discussion, we suspect there will need to be a stronger shift in the language at the June Federal Open Market Committee meeting for a July rate cut to come to fruition.
The U.S. Treasury market witnessed a swift repricing of the curve during the month of May as the 10-year Treasury yield dropped nearly 40 basis points.
Rising expectations for rate cuts from the Fed bled its way into the U.S. Treasury market as we witnessed a swift repricing of the curve during the month of May. There was a dramatic shift lower across the curve with Treasury yields between 2 and 10 years dropping by an average of 40 basis points. Declining yields on U.S. Treasuries is resulting from a combination of several factors. First, fears of escalating tariffs and a prolonged trade war between the U.S. and China have greater potential to slow growth and ultimately continue to increase odds of Fed rate cuts. In addition, real yields continue to decline as inflation continues to show no sign of picking up despite low levels of unemployment. Overall, we have decided to lower our forecasted range for the 10-year Treasury yield by 25 basis points to reflect the shift in market sentiment and the increased bias towards rate cuts from the Fed later this year. Therefore, we now expect the 10-year Treasury to end the year within a range of 2.00% to 2.50%.
The views expressed above reflect the views of Allianz Investment Management LLC, as of 06/2019. These views may change as market or other conditions change. This report is not intended and should not be used to provide financial advice and does not address or account for an individual's circumstances. Past performance does not guarantee future results and no forecast should be considered a guarantee either. Allianz Investment Management LLC is a registered investment advisor that is a wholly owned subsidiary of Allianz Life Insurance Company of North America. Allianz Life Insurance Company of New York is also a wholly owned subsidiary of Allianz Life Insurance Company of North America.