Category: Market Action

Those hoping for higher global interest rates via expansionary fiscal policy may soon get their wish:

Donald Trump’s gracious victory speech did two things. It defused much of the negative impact of the shock; and it reminded everyone that the US would have a more expansionary fiscal policy under a Trump presidency than it would have done under a Clinton one. This latter point may take time to be reflected in the markets, and the negative tone on international trade will put pressure on emerging markets. But it is quite plausible that US shares will rise rather than fall over the next few weeks. The dollar should recover swiftly too.

The reason for this is the easing of fiscal policy. With a supportive Congress it should be possible for the new President to get his proposed cuts in both corporation tax and income tax into law next year. Big business did not support a Trump victory but it will benefit from it. Of course, recession fears remain, for this has been a long expansion and the economy is pushing towards full capacity, but US growth next year may surprise on the up side, not the down. Additional spending on infrastructure will take time to feed through – there is no such thing as a shovel-ready project – but such investment will inevitably add to growth in the medium-term.

It is hard, however, to see growth being fast enough to close the budget deficit. A looser fiscal policy will be countered by a tighter monetary one. There was great hostility in the Trump campaign towards the Federal Reserve and to its chair Janet Yellen. But the Fed is independent and it would be unwise of any new administration to pick a fight with it. Right now the markets estimate that the chances of another rise in interest rates in December have shrunk from a near-certainty to an even bet. But this election increases the intellectual case for higher rates. Once they have settled down the markets may come to accept that such rises are inevitable and welcome.

There’s good support for this view:

The Committee for a Responsible Budget said this has made it difficult to evaluate Mr. Trump’s proposals, but estimated they could add $5.3-trillion (U.S.) to the federal debt over 10 years.
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The initial impact of Mr. Trump’s protectionist policies may not be all bad. Economist Barry Eichengreen argued earlier this year that while tariffs threaten to fan trade wars and geopolitical tensions, the initial impact would be to boost U.S. wages and inflation, something the Federal Reserve’s easy money policies have so far struggled to accomplish.

Mr. Zandi’s team at Moody’s Analytics estimates that fully implementing Mr. Trump’s trade and immigration proposals could drive up inflation, eventually triggering aggressive Fed rate hikes and a recession, a concern shared by some investors.

PerpetualDiscounts now yield 5.13%, equivalent to 6.67% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 3.9%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 275bp, a sharp narrowing from the 290bp reported on November 2.

Sweet Baby Jesus:

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Just before midnight on election day

The markets could be interesting tomorrow:

Panicked investors rushed to unwind bets they’d piled on amid predictions Clinton would sweep to victory. Futures on the S&P 500 Index plunged more than 4 percent and Mexico’s peso — which tends to weaken as Trump’s prospects improve — sank by the most in two decades. U.S. Treasuries, the yen and gold all soared by the most since Britain’s surprise vote to leave the European Union sent shockwaves through markets in late June.

Jobs, jobs, jobs!

Employers in the U.S. added 161,000 non-farm jobs in October, the Bureau of Labor Statistics reported on Friday. The unemployment rate ticked down to 4.9% from 5%. This marks the 73rd consecutive month of job growth.

Economists expected to see 178,000 jobs added and for the unemployment rate to tick down to 4.9%.

“Employment continued to trend up in health care, professional and business services, and financial activities,” the BLS said in its release, going on to explain that health care added 31,000 jobs last month. Over the past year, health care has added 415,000 jobs.
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The bigger story within the report very well may be on the earnings front. The BLS reported that average hourly earnings for all employees on private non-farm payrolls rose by 10 cents to $25.92 in October. Over the past year, average hourly earnings have risen 2.8%. Economists point to this as reason to believe the U.S. labor market has reached full employment — and that the Federal Reserve will hike interest rates by 0.25% in December.

Bloomberg adds:

The larger-than-expected wage increase in October was helped by a 2 percent jump from September in hourly pay of utility workers, who scrambled to get power and telecommunications restored after Hurricane Matthew struck the southeastern U.S. The gain was the largest since November 2012, when there was a 2.5 percent surge in the aftermath of Hurricane Sandy — a gain that partially reversed the following month.

Other gauges show pay gains rising. The Atlanta Fed’s Wage Growth Tracker indicates median pay rising an average 3.6 percent over the past three months, matching the fastest rate since January 2009. The Labor Department’s Employment Cost Index was up 2.3 percent in the third quarter from a year earlier, matching the second-fastest pace of this expansion.

There were even jobs – of a sort – in Canada!

Part-time work has become the mainstay of job creation in Canada, a worrisome trend in the country’s labour market.

From September to October, part-time employment jumped by 67,000 spots and full-time fell by 23,000, according to Statistics Canada’s monthly labour report released on Friday.

Even though Canada gained a net 44,000 jobs last month, the number of hours worked declined because of the shift from full-time work to part-time.

… and the Society of Canadians for Trump has 63,000 new members!

Nowhere was this [lack of momentum in the economy] felt more than among men who are in their prime working age of between 25 and 54. This cohort has suffered a staggering loss of 63,000 full-time positions over the year, compared with a gain of 36,000 part-time spots.

… but the market focussed on the American election:

U.S. stocks posted their longest slide since 1980, while Treasuries rallied after data showing progress in the American labor market did little to soothe anxiety over the presidential election. Oil slumped.

The S&P 500 Index dropped for a ninth straight day, a gauge of equity volatility had the longest stretch of gains on record and Treasuries climbed the most since September ahead of next week’s vote. All the jitters sent the dollar down after a brief advance that followed data showing U.S. jobs rose at a steady pace in October, supporting a Federal Reserve hike next month. Oil sank as hopes faded that OPEC will be able to implement a deal to cut output.

The incompetent have their shorts in a knot because Standard Chartered did not honour a pretend-maturity:

Perpetuals are popular because bonds without a legal maturity date may qualify as equity according to International Financial Reporting Standards, reducing a company’s leverage in the eyes of banks and making it easier for them to get lower rates on loans. Investors buy them because they’re pretty certain they’ll be redeemed in full at the first call.

In other words, these are three- to five-year notes that pay higher yields than regular securities of a similar tenor.StanChart has now challenged that notion.

The London-based lender said in its third-quarter earnings statement Tuesday that it wouldn’t exercise the option it has in January to buy back its $750 million of 6.409 percent non-cumulative redeemable preference shares that were issued in 2006.

That makes sense, from the bank’s standpoint. After January 2017, the notes convert to paying three-month Libor plus 151 basis points. At current levels, that translates into a yield of less than 2.4 percent. StanChart’s 10.5-year 4.3 percent dollar bonds due 2027 are yielding 4.5 percent.

The fact a perpetual might not be called isn’t something most investors consider when they purchase the notes. Now, they’re having to think about what would be a fair price for a lot of the debt they hold if, when the time comes, it may be cheaper for a company not to act.

In today’s FOMC release:

The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further. Inflation is expected to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.

Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The Committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives.
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Voting against the action were: Esther L. George and Loretta J. Mester, each of whom preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.

Some were fascinated by the word “some”:

The Fed’s use of the word “some” versus the harder-hitting “next meeting” phrasing of October 2015 to signal an approaching move was appropriate for several reasons, said Vincent Reinhart, chief economist at Standish Mellon Asset Management Co LLC in Boston, who in his former role as a Fed economist has helped draft statement language.

Investors prior to the meeting had already priced in about a 70 percent probability of Fed action next month, so there was no need to hammer home the point. The chances of a move shifted up to 80 percent following release of the FOMC statement.

PerpetualDiscounts now yield 5.13%, equivalent to 6.67% interest at the standard equivalency factor of 1.3x. Long corporates yield a smidgen under 3.8%, so the pre-tax interest-equivalent spread is now about 290bp, unchanged from the October 5 report.

Today’s top news story is that people lash out when disturbed by change:

In this western Wisconsin enclave and other pockets of the rural Midwest, Mr. Trump’s pledge to build a wall along the Mexican border and prioritize jobs for American workers has struck a chord with some whites uneasy over rapidly changing demographics. They said they are worried illegal immigrants are crowding schools and unfairly tapping public assistance, problems they believe Mr. Trump would fix.

The Journal identified the epicenter of this shift using the diversity index, a tool often used by social scientists and economists. It measures the chance that any two people in a county will have a different race or ethnicity. In 244 counties, that diversity index at least doubled between 2000 and 2015, and more than half those counties were in the cluster of five Midwestern states. The analysis excludes tiny counties that produce numeric aberrations.

Traditional immigrant gateways like Los Angeles, Miami and Queens, N.Y., draw a far greater number of Latino and other minority residents, but because they have long been melting pots, their diversity has barely changed over the past 15 years.

In 88% of the rapidly diversifying counties, Latino population growth was the main driver. In about two-thirds of counties, newcomers helped expand the overall population. In the remaining third, the population fell despite an influx of new arrivals, which magnified the shift for locals as their peers died or moved away.

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More on my speculation on small-batch craftsmanship as the future of employment:

Today, smaller plants are particularly important to job creation in factory work, said Scott Paul, president of the Alliance for American Manufacturing. “Megafactories are the exception today,” Mr. Paul said. “Small manufacturing is holding its own — and you are seeing some interesting developments in urban centers.”

Out of 252,000 manufacturing companies in the United States, only 3,700 had more than 500 workers. The vast majority employ fewer than 20

While they may not rival the scale of 1950s assembly lines, these smaller craft-type producers hold out hope for cities, Mr. Paul said, particularly as some companies look to move jobs back from overseas to be closer to customers and more nimble to supply customized, small-batch orders.

What is more, these jobs pay people more. According to the Bureau of Labor Statistics, manufacturing workers typically earn just over $26 an hour. By contrast, medical orderlies and nurse’s assistants (a growing field) earn half as much. And fast food, a mainstay for Americans with a high school diploma or less, has a median hourly wage of $9.11.

It’s also support for my other thesis: don’t bet against America! That bet’s been a losing game since 1850!

The financial services prep-school boys are hurting:

This is Wall Street’s new tech meritocracy. Financial institutions traditionally coveted graduates from Stanford and other big-name schools and people already working in Silicon Valley. But that system tends to overlook good programmers from other schools or gifted dropouts, according to recruiters. And besides, banks need to fill so many programming jobs that elite schools can’t possibly pump out enough candidates.

So the industry is looking in places it never did, turning to outside firms to evaluate prospective programmers based on objective measurements, not their pedigree. The idea is that people lacking a computer science degree — art majors, graphic designers and chemistry graduates from the University of Delaware like Furlong — can still make the leap to well-paid careers in technology. By using algorithms to spot talented coders, HackerRank and competitors with names like Codility claim they’ve essentially increased the world’s supply of developers.

There are some who think that the fixed income tide has turned:

Bonds worldwide have lost 2.9 percent in October, according to the Bloomberg Barclays Global Aggregate Index, which tracks everything from sovereign obligations to mortgage-backed debt to corporate borrowings. The last time the bond world was dealt such a blow was May 2013, when then-Federal Reserve Chairman Ben S. Bernanke signaled the central bank might slow its unprecedented bond buying.

Europe led the losses that reverberated worldwide this week as signs of accelerating inflation and economic growth spurred speculation that the European Central Bank and its major counterparts are moving closer to curbing monetary stimulus, including asset purchases. The result is that investors are abandoning one of the year’s biggest trades — a bet on higher-yielding, long-term bonds — as they wake up to the limits of central-bank demand that drove bond yields to record lows as recently as July.
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Yields on 10-year gilts reached 1.31 percent, the highest since June 23, the day of the U.K. vote to leave the European Union. Similar-maturity German bonds were set for their worst month since 2013, pushing yields to 0.217 percent, a level last seen in May. U.S. 10-year Treasury yields touched about 1.88 percent, the highest since May.

Assiduous Reader MichaelA brings to my attention a wonderful, lengthy article on practical robotics research titled Pizza, the unsung agent of the robot revolution:

It’s often been said that without the online adult entertainment industry driving innovation on the Internet, the e-commerce and video streaming platforms that we take for granted today would never have matured so rapidly.

In years to come, will we be saying the same about pizza’s role in accelerating retail delivery technologies?

Pizza and porn, driving technological progress! You see, girls, us guys really do serve a higher purpose!