Nothing Matters
Doug Nolan
Two-year Treasury yields dropped 14 bps this week, to the low (4.60%) since March 27th.
Ten-year yields fell 12 bps to 4.28% (within a few bps of the low since March), while benchmark MBS yields sank 16 bps to 5.73% (also near lows back to March).
The market ended the week pricing a 4.82% policy rate for the Fed’s December 18th meeting, implying 51 bps of rate reduction (two cuts).
The rate was down six bps this week, to the lowest close since May 15th.
Bonds have turned notably receptive to indications of economic softening.
With the Fed signaling the importance of labor market performance, markets this week reacted to weaker-than-expected June Non-Farm payroll (and household survey) and ADP data.
While total non-farm payrolls increased a stronger-than-expected 206,000 (est. 190k), private payrolls rose a meaningfully weaker-than-expected 136,000 (est. 160k).
Manufacturing jobs declined 8,000 versus a forecast of a gain of 5,000.
Previous months payroll additions were revised lower.
ADP job gains were reported at 150,000 versus the 165,000 median forecast.
The grossly imbalanced U.S. economy may be weaker - but not weak.
It is certainly vulnerable.
Yet I remain unconvinced that we are observing the start of a major downturn.
Financial conditions remain exceptionally loose.
Meanwhile, the bond market has developed a propensity for lower yields.
Stronger data tend to be ignored, while yields quickly fall after weaker economic reports.
Especially with the interplay of highly speculative market dynamics, loose conditions, and robust system Credit expansion, I don’t want to dismiss the importance of lower market yields.
Probabilities remain reasonably high that the market response (lower yields and looser conditions) to weaker data will underpin economic activity.
It’s reasonable for the Wall Street consensus to interpret recent bond market behavior as confirmation of a downturn about to trigger a Fed easing cycle.
But I tend to view global bond yields as reacting to mounting risks, latent fragilities, and heightened vulnerability at the “periphery.”
It’s more about fragile market structure than economic activity.
July 3 – Financial Times (Adrienne Klasa and Leila Abboud):
“France’s leftist and centrist parties have pulled hundreds of candidates from Sunday’s high-stakes election in a co-ordinated attempt to keep the far-right Rassemblement National out of power.
By a deadline on Tuesday evening, more than 200 third-placed candidates from the left and centre had dropped out as their parties sought to avoid splitting the anti-RN vote and decrease the likelihood of it achieving an absolute majority.
The figure… represents more than two-thirds of the three-way races produced by last weekend’s first-round vote.”
July 4 – Bloomberg (James Regan):
“Marine Le Pen’s National Rally is set to fall well short of an absolute majority in the French legislative election on Sunday, according to projections from polling companies.
The far-right group and its allies are on course to win between 190 and 250 of the 577 seats in the National Assembly, based on four surveys released on Wednesday and Thursday.
That would be significantly below the 289 that would enable it to pass bills easily and push through its agenda.”
French – and European and even global - markets were comforted by the prospect of political gridlock (better than the alternative).
France’s CAC 40 equities index rallied 1.8%.
French yields dropped nine bps to 3.21%.
With German bund yields reversing five bps higher to 2.56%, the spread between French and German yields narrowed about 15 bps to 65 bps (reversing almost half of the recent widening).
Italian spreads collapsed 19 bps (to 138bps), and Greek yields narrowed 20 bps (to 20bps).
Société Generali CDS dropped 11 to 49 bps, with BNP Paribas CDS falling 10 to 42 bps – both now within a few bps of pre-election levels.
European Bank (subordinated) debt CDS sank 20 to 109 bps, having spiked to 135 bps from a near multi-year low on June 6th of 103 bps.
The euro rallied 1.2% this week, more than reversing the post-election decline.
The Nasdaq100 surged 3.4% this week to an all-time high.
It’s no coincidence that the AI/Tech mania Bubbles along, even as stress builds at the “periphery.”
For one, elevated global risk boosts shorting and hedging.
This bearish positioning is susceptible to market-fueling squeezes.
Weak-handed (low pain threshold) shorts help the market climb the proverbial wall of worry.
Little wonder that risk is disregarded, and complacency reigns supreme at this late cycle phase.
Delving a little deeper into “no coincidence” analysis, it’s important to appreciate that rising global political instability and manic speculative Bubbles are both long-term manifestations of monetary disorder.
Unprecedented debt and monetary inflation have fueled historic asset inflation and wealth inequality.
And the greater inequality and intensity of speculative Bubbles, the more confident Wall Street becomes that the Federal Reserve (and global central banks) wouldn’t dare risk a blowup.
Friday NYT headline: "Political Unrest Worldwide Is Fueled by High Prices and Huge Debts."
Years of Bubble Dynamics ensure bifurcated economies both at home and abroad.
Using the weak and suffering as justification, a self-serving Wall Street beckons the Fed to loosen monetary policy.
And the prospect for lower policy rates only stokes asset inflation and Bubbles, exacerbating systemic fragilities and gross wealth disparities.
The Fed erred in taking rate hikes off the table, while signaling prospective rate cuts.
The inflationist crowd will invariably argue that the Fed miscalculated by not cutting rates sooner.
Instead, the grave policy error was the Fed’s failure to impose sufficiently tight financial conditions.
Sure, Wall Street strategists and market pundits will claim otherwise.
But it is categorically reckless monetary management to discuss rate cuts when markets are in the throes of a historic speculative mania and global AI/tech arms race.
It's certainly possible that French voters deny Le Pen’s National Rally party a majority of Parliamentary seats and control of the government.
Markets this week celebrated the likelihood of French political paralysis.
But this is just speculative market shortsightedness.
The global populism movement is just gathering momentum.
Government debt problems are about to get underway.
A historic speculative melt-up certainly helps mask the reality of decades of inflationism coming home to roost.
Markets can disregard the root causes and ramifications of French and UK elections.
And they can ignore the increasingly alarming geopolitical environment.
Ditto for the deranged climate.
Apparently, Nothing Matters so long as the AI and big tech stocks are running.
But each passing week global markets become only more fragile and susceptible to an unexpected bout of de-risking/deleveraging.
My worries only grow when Bubble markets demonstrate an incapacity to react to - and adjust for - myriad mounting risks.
July 2 – Financial Times (Martin Arnold):
“The head of the Federal Reserve has warned the US economy is too strong to justify running such high deficits and urged Washington to address its fiscal imbalance ‘sooner rather than later’, in a sign of monetary policymakers’ rising concern about rampant government spending.
Jay Powell warned that the Biden administration was taking excessive risks by ‘running a very large deficit at a time when we are at full employment’ and said ‘you can’t run these levels in good economic times for very long’.
The jobless rate in the world’s largest economy has not exceeded its current level of 4% for more than two years, longer than at any time since Powell was ‘a teenager’, the Fed chair said.”
Only higher yields and market discipline will force Washington to start the process of getting its financial house in order.
And surely market discipline would have imposed Washington spending restraint some years ago, if not for the Fed’s recurring QE gambles.
It’s worth noting that Gold jumped 2.8% and Silver 7.1% this week.
The metals are sniffing out inflation risk and financial asset fragility.
Sunday’s French election will be interesting.
And if markets can plug their noses and get through French politics, it’s only four months from a real stink bomb U.S. election.
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