Many lessons should be learned from the message sent last night. I’ll take one, that populism and anger go both ways. The question next from an economic standpoint (which is what matters most to the many) is how this will be channeled. To be as succinct as possible, through trade protection or by making the US a competitive place to do business via tax and regulatory policy and wage and benefits? Will an expected fiscal package be through Keynesian spending largesse or by a shift in taxes and regulation or both? We all want better infrastructure but is ‘shovel ready’ the best we’ll get? What is the fate of Obamacare? What I believe is the regulatory and social welfare state has grown to an enormous size coincident with a massive accumulation of debt which has resulted in slower growth. A time out has been called but we should still wonder how things unfold from here based on the personality of our new leader. You’ll all be bombarded with everyone’s ‘thoughts’ today so I’ll leave it at that and turn to the markets.
The decline in the S&P futures last night was an obvious give back of the rally the past two days because it was clear what most market participants wanted but what’s really interesting is the action in US Treasuries. Most equities have made up those declines and particular sectors are taking the market much higher into the close. The US 10 yr yield was near 1.70% last night in a flight to safety trade when the S&P futures were down about 100 pts. With the yield at 2.00% now, it’s clear that markets are prepping for a fiscal economic shot in the arm and the inflationary implications. They also could be facing a situation where foreigners step up their selling of US Treasuries because of the danger now over what protectionist policies, if any, the Trump Administration will implement.
Inflation breakevens are spiking. The 10 yr breakeven is up 8 bps, the largest one day move since March, to 1.82% which is the highest level since July 2015. See chart below. Janet Yellen and the Fed will definitely hike rates next month but how are they going to respond next year if inflation really starts to pick up? It is not until August 2018 that the fed funds futures contract table is fully priced for another hike after the next one. The CRB raw industrials index rose yesterday for the 11th day in the past 12. I repeat, higher interest rates are a major risk to all asset prices.
The FX response was very divided with the Mexican peso of course lower but weakness was also seen against the Aussie and Canadian dollars and the Asian ones too along with other EM. The dollar on the other hand was down sharply against the yen and lower vs the euro and pound.
Mortgage applications to buy a home rose 1.4% w/o/w off the lowest level since January and is up almost 11% y/o/y. Refis though fell 2.7% and are down for the 5th straight week to the weakest pace since June as rates moved higher again.