The latest Fed’s Beige Book painted quite a bleak picture. If you are a coffee drinker, here’s a snippet from the New York survey “A coffee roaster reported that tariffs on Brazilian coffee and on other supplies were creating shockwaves through the supply chain.” Essentially the report was littered with tariff warnings on prices. Even second-round effects, as from the Richmond survey we had, for example, “A printer manufacturer that doesn’t import products experienced increased costs ranging from 5% to 15% from suppliers who were subject to tariffs.” There was also mention of strains on household budgets, contracting opportunities in the jobs market, and flat to declining consumer spending. That’s about as bleak a report as we’ve had from the Fed in quite some time.
Treasuries did not do a whole lot on the back of that, partly as it had already reacted to weakness in the JOLTS report earlier in the day. The curve even flattened on the day, as long end yields fell by more than short end ones. The 10yr yield fell on the day, but balked at breaking below 4.2%, settling above that level, while the 2yr did similar by bouncing off the 3.6% level to settle slightly above that. The 30yr yield fell impressively too, to just below 4.9%. That was the other big impulse to be aware of, the easing of upward pressure on long-end yields, helped by the 30yr UK gilt yield ratcheting lower for a change. That said, the upward pressure on the Japan 30yr yield continued (amazing value out there now when swapped back to dollars, on a synthetic yield in excess of 7%).
Despite the US flattening, we still thing steepening from both ends is the way to go ahead.