Category: Market Action

US fiscal stimulus bets first increased:

Routs in global bonds and emerging markets intensified, while the dollar climbed as investors positioned for the wave of U.S. fiscal stimulus that President-elect Donald Trump has pledged to unleash.

The yield on 30-year Treasuries rose to the highest since January, with last week’s record debt selloff bleeding into Monday trading and weighing on credit markets. The Bloomberg Dollar Spot Index advanced to a nine-month high as the U.S. currency strengthened against most major counterparts. American stocks were little changed and shares in developing nations sank to a four-month low. Copper climbed, while oil fell with gold.

… and then moderated:

The fallout from Donald Trump’s election to the U.S. presidency showed signs of moderating in financial markets with benchmark Treasuries and emerging-market stocks advancing for the first time in a week amid a retreat in the dollar.

The yield on U.S. government bonds due in a decade fell from its highest level of the year and sovereign notes in Australia fluctuated after a three-day slide. Bloomberg’s dollar index declined for the first time since Americans voted Trump in a week ago and an MSCI gauge of emerging-market stocks rebounded from a four-month low. Gold pulled out of its steepest slide in more than a year, while zinc led a rally in industrial metals. Crude oil rose from an eight-week low as OPEC members sought to agree output quotas.

So … we’ll see! But Eric Reguly reminds us:

Mr. Trump has awakened the bond vigilantes. They can be nasty. In 1994, they battled president Bill Clinton and won. In his first term, Mr. Clinton wanted to boost spending and implement a middle-class tax cut. Investor worries about high spending sent U.S. 10-year yields above 8 per cent and Mr. Clinton was forced to dilute his domestic economic agenda.

… while Scott Barlow reports:

The five-year government of Canada yield – yes, the one that drives mortgage rates – popped above one per cent this morning after starting last week with a yield of 70 basis points.

The close for GOC-5 was 0.95%, according to Perimeter Markets Inc..

There is continued excitement over potential US fiscal stimulus:

A bond-market gauge on Thursday hit its highest level since the summer of 2015. The 10-year break-even inflation rate indicated expected annual inflation of 1.89% over the next 10 years. That measure, reflecting the gap in yields between Treasurys and their inflation-protected counterparts, known as TIPS, was 1.73% two days ago, according to Tradeweb.

The yield on the 10-year Treasury note, which rises when bond prices fall, climbed another 0.05 percentage point on Thursday to 2.118%. It has jumped a quarter of a percentage point since before the U.S. election result, the biggest two-day rise since 2011. Nominal bond rates have been rising faster than those protected against inflation, meaning that inflation protection is increasingly viewed as the more attractive investment.
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One spark for the latest inflation trade came when Mr. Trump mentioned infrastructure spending prominently Wednesday morning in his victory speech, investors say. Others believe efforts to repeal financial regulations enacted by President Barack Obama’s administration could expand bank lending activity, and that restrictions on trade could boost wages in an already strong labor market.

The New York Times has a bit more colour:

For the last few years, the world has suffered from a chronic shortage of demand, depressing inflation and interest rates worldwide.

If those conditions persist, a Trump administration may have some room to expand deficits without triggering a spike in interest rates that would undo any economic boost those deficits create.

But many economists don’t see it working out that way. Mark Zandi, chief economist at Moody’s Analytics, was skeptical in a much-discussed paper released earlier in the year estimating the economic impact of a Trump administration. He assumed that if Mr. Trump’s policies were taken at face value, it would increase the deficit from 3.5 percent of G.D.P. this year to more than 10 percent by the end of Mr. Trump’s term. He said this would cause the Federal Reserve to raise interest rates above 6 percent in 2018 to prevent inflation.

Who’s up for a 6% Fed policy rate? Who wants to know what will happen to the loony and Canadian house prices then?

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:

Click for Big
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.