Markets were generally quiet yesterday. Treasuries rebounded marginally following a bruising two day sell off following statements made by Cleveland Fed Bank of Cleveland President Loretta Mester that while she is not in a rush to begin cutting rates, “policy makers will gain confidence to ease later this year if the economy evolves as expected.”
FRB Chair Powell stated the markets are devoid of any geopolitical premium, stating that geopolitical issues are the greatest threat to the economy and the markets.
January’s ISM Services Index was released earlier in the week and perhaps little attention was focus upon the statement that “transportation issues of the Suez Canal due to the unrest in the Red Sea and the drought issues of the Panama Canal are now impacting both costs and scheduling for the transportation of goods.”
A major tenant of trade is uncontested trade and travel on the oceans. For the first time since early 1945 ocean trade is being challenged. Piracy is rising throughout the Indian Ocean as well as around the Horn of Africa. Approximately 15% of global trades passes through the Red Sea. The Baltic Sea is now contested and safe passage through the Strait of Hormoz is only guaranteed by the shadowing of US Navy ships.
A major fear of military planners is a drone swarm attack in the Straight of Hormoz where the US Navy must choose to either defend itself or a supertanker.
Writing the obvious, the longer trade routes are interrupted, the greater the potential inflationary [and monetary] threat. The ISM Services Index has commented on transportation issues, comments that were largely ignored.
The auction of $54 billion of the two-year Treasury was met with “solid demand,” the result of the previous two-day selloff that sent yields to the highest level since the mid December “Fed pivot.”
Today $42 billion in ten-year Treasury notes are auctioned, record amount. Will demand be the same as it was for the 2-year Treasury?
Last night the foreign markets were down. London was down 0.43%, Paris down 0.23% and Frankfurt down 0.30%. China was up 1.44%, Japan down 0.11% and Hang Seng down 0.34%. Futures are flat. The narrative is starting to rise about the massive amount of Treasuries that must be auctioned this year. The question is not whether the auctions will fail but rather what price/yield will it take to meet demand. Fears are not necessarily focused on today’s auctions but in the proceeding month’s auctions where investor demand may be already usurped. The 10-year is off 7/32 to yield 4.14%.
