While Donald Trump is far from Ronald Reagan, the market belief yesterday was that the country, economically speaking, will move from left to right to the extent it did in 1980. This of course comes after Monday’s 2.2% S&P rally on the hopes we would keep going left. Yes, the market is bipolar but yesterday’s move is more rational than Monday’s. The S&P 500 rallied 1.1% yesterday and did so on November 5th, 1980 by 2.3% the day after that election. On the following day in 1980 it gave back that entire bounce but then proceeded to rally by 8 straight days. A major difference though, between then and now, was that the 10 yr yield on election day 1980 was 12.5%, inflation was also 12.5% and the P/E multiple (on LTM basis) in the S&P 500 was 8.5. The reversal of each of course were three key components, along with faster growth, of the ensuing 18 year bull market that began in August 1982. Between late November 1980 and August 1982 however the S&P’s fell 27% in response to the recession. While hopes for faster growth are certainly similar today, the current yield, inflation and the earnings multiple is just about the exact opposite. We now have interest rates and inflation that have bottomed vs the top they put in during the early 1980’s.
Bottom line, I’m hopeful that we will see faster growth over the next four years with the coming changes in policy (hopefully no trade protection and the economic wars it brings) but in the context of the bond bubble that is now leaking and the collateral asset prices bubbles it has spawned there will be a bumpy bridge between the current environment and fully enjoying the benefits of that hoped for faster growth. The lunch bill from the extraordinary monetary policy seen over the past 9 years is not free and will have a high price.
With how the Fed will deal with this, they must get ahead of the game here. Yes, they will raise rates in December but their real test will be in 2017 because their monetary policy response will not be voluntary if the market starts forcing their hands. In case you missed it, the CRB raw industrials index rallied yesterday for the 12th day in the past 13 and copper is up another 3.3% today and is up 13 straight days. I’ve been arguing for a while now not to ignore the supply cuts that have been going on for the past year.
Capturing yesterday’s market and election shock and awe led to a 15 pt jump in Bulls in the weekly AAII to 38.9. Bears fell 5 pts to 29.3 and those that are Neutral fell by the balance.
Initial jobless claims fell 11k to 254k, 6k less than expected but brings the 4 week average to 260k from 258k as a 247k print drops out. Continuing claims, delayed by a week, rose 18k off the lowest level since 2000. The bottom line remains the same bottom line week after week in that employers are holding on to their qualified employees in a time where it’s getting tougher and tougher to find new ones.
Following the soft 10 yr note auction yesterday, the 30 yr bond auction was weak as well. The yield of 2.902% was above the when issued of 2.89%ish. The bid to cover of 2.11 was well below the previous 12 month average of 2.32 and at the lowest level since February. Also of note, direct and indirect bidders took 67% of the auction vs the one year average of 71%.
Bottom line, we’ve see the violent move higher in interest rates over the past few days but the 9 month high in yields wasn’t enough to bring out the buyers. On the other hand, who wants to catch this knife. Pension funds and insurance companies are big players at this part of the curve but we can’t separate them out to see what they’ve bought as this is a 9 month gift for them. What’s noteworthy about the move higher in yields is that inflation expectations are coming with it as opposed to moving just on the supply and demand for money driven by economic growth. The 10 yr inflation breakeven is higher by another 5.5 bps today to 1.90%. See chart:
Imagine trading stocks in Japan the past few days. The Nikkei fell 5.4% on Wednesday and rallied 6.7% overnight. This is not some 3rd world country. The weaker yen is helping as it approaches a 3 month high. With the spike in US interest rates yesterday, the 40 yr JGB yield was up by 4 bps. The yield rise was tempered somewhat by machinery orders in September that fell 3.3%, about twice the estimate of a drop of 1.5%.
The rest of the Asian sovereign bond markets got hammered. The yield on the Australian 10 yr spiked by 28 bps and in South Korea and Hong Kong by 16 bps. European yields were little changed yesterday but are responding to the global bond carnage today. The German 10 yr yield has now almost doubled in the past 3 trading days to .28% with another 7 bps gain today. That’s the highest since late April. The UK gilt 10 yr yield is near its pre Brexit level and up almost 20 bps this week.
In Europe, French IP was soft, falling 1.1% m/o/m vs the estimate of down .3% and the weakness was led by manufacturing. One step forward, one step back for the French economy. Italian IP fell .8% m/o/m, in line with the estimate if we take the upward revision to August.