The Dog That Does More Than Bark
Doug Nolan
Treasury Secretary Scott Bessent’s Thursday comment is credible: “The President wants lower rates.
He and I are focused on the 10-year Treasury and what is the yield of that.”
“Everyone has a plan, until they get punched in the mouth” (Mike Tyson).
The Trump administration definitely has some grandiose plans.
Dressed in baggy attire and too often projecting a pacifist temperament - but when pushed too far, the bond market can reveal the inner brute force of a prizefighter.
Global bond markets have been agitated over recent months.
The resurrected bond vigilantes have been circling.
But global bonds have enjoyed a nice rally of late.
After trading at 4.80% on January 14th, 10-year Treasury yields touched a seven-week low 4.40% during Wednesday trading.
UK gilt yields dropped from a 4.92% trading high to 4.37%; French yields 3.49% to 3.05%; German yields 2.65% to 2.34%; Italian yields 3.85% to 3.43%; Canadian yields 3.56% to 2.88%; and Australian yields 4.66% to 4.29%.
Sinking Treasury yields were especially pacifying for distressed EM bonds.
Brazil’s dollar bond yields sank from 7.11% to 6.49%, with Mexico’s yields falling from 6.80% to 6.38%.
Local currency yields swung from 10.46% to 9.71% in Mexico and from 15.44% to 14.31% in Brazil.
Importantly, sinking yields lessened the intense pressure on EM currencies, pressure which had forced “doom loop” EM currency intervention and associated liquidation of international holdings (chiefly Treasuries).
And with significant hedging in Treasuries and the currencies, the reversal in global yields spurred the unwind of hedges – providing additional trading support for lower yields and a weaker dollar.
Lower global yields have been instrumental in restraining crisis dynamics at the “periphery” that were increasingly transmitting contagion effects to the vulnerable “core.”
Surging Treasury yields were approaching the pain point of aggressive hedging, de-risking, deleveraging and waning liquidity - an especially problematic dynamic for such a highly speculative equities market.
The manically Crowded Mag7/AI/tech trade is especially vulnerable.
In the grand scheme of things, the pullback in global yields has been shallow and about what one would expect in an unsettled backdrop.
It’s worth noting that after trading to 4.22% in October 2022, 10-year Treasury yields were back below 3.40% in April 2023, only to reverse sharply higher to 5.0% in October 2023, back down to 3.80% to end ‘23, up to 4.71% last April, down to 3.65% in September, before surging back to 4.79% by the middle of last month.
Our President and Treasury Secretary have reason to be nervous.
A break higher in Treasury yields would be destabilizing.
Yields closed the week about 50 bps below the key psychological 5% level.
The unfolding Trump agenda is filled with potentially problematic issues for the bond market.
With the recent Treasury rally supporting the bullish narrative, a sanguine view on tariffs has dominated: generally, tariffs are seen as having a more negative impact on growth than on elevated inflation.
I expect much more attention (news and analysis) on inflationary tariff impacts with the return to a rising yield environment.
I also expect the bond market to now take a more skeptical view of budget negotiations.
The benefit of the doubt has been extended to Republican deficit hawks ready to hold the line.
Again, with yields declining, it has been easy to dismiss the litany of President Trump’s campaign tax cut promises.
February 6 – Bloomberg (Akayla Gardner, Billy House and Alicia Diaz):
“President Donald Trump outlined his tax priorities in a meeting with Republican lawmakers, including ending the carried interest tax break used by private equity fund managers and expanding the state and local tax deduction…
Among the tax cuts he mentioned are his campaign pledges to end levies on tips, Social Security payments and overtime pay.
Leavitt also said Trump wants to end what she cast as ‘special tax breaks for billionaire sports team owners’ and create new cuts for made-in-America products.’”
February 7 – Washington Times (Lindsey McPherson):
“President Trump laid down a demand Friday for a ‘balanced budget’ while a nonpartisan budget group estimated his tax priorities will cost at least $5 trillion over 10 years and perhaps double that.
Both contentions come after Mr. Trump met with House Republicans… to help them work through internal party disagreements on a budget resolution.
It’s the first step in advancing his legislative agenda through Congress using the budget reconciliation process that lets Republicans pass their priorities without the threat of a Democratic filibuster in the Senate.
“BALANCED BUDGET!!!” the president posted… Friday…
The Committee for a Responsible Federal Budget released an estimate of the tax priorities that Mr. Trump laid out during this week’s meeting with House Republicans, finding the proposals would cost $5 trillion to $11.2 trillion over 10 years…
The bulk of that cost, $3.9 trillion to 4.8 trillion, comes from extending tax cuts enacted during Mr. Trump’s first term…
His plan to cut taxes on income from tips, overtime pay and Social Security benefits would cost $900 billion to $5 trillion.”
The President these days is nothing if not emboldened.
It’s not unrealistic to contemplate a scenario where Trump demands Republicans move forward with this litany of tax cuts, to be offset in a budget anticipating a significant boost in receipts from tariffs and taxes on “carried interest.”
Markets could have issues.
The implementation of a major revenue-generating tariff regime comes with myriad risks and uncertainties, raising the odds of trade wars, supply chain issues, economic dislocation, and higher inflation.
Taxing “carried interest” also comes with uncertainties, including the potential to spark hedge fund liquidations.
If I were the bond market, I’d be leery of a budget big on tax cuts offset by indeterminate revenue sources.
This becomes a more pressing issue for a bond market facing heightened overheating risks.
Friday data support the overheating risk thesis.
A 4.0% unemployment rate on its face should be a bond market concern.
And January’s 0.5% surge in weekly hourly earnings suggests upside wage inflation risk.
And while January’s payroll increase (143k) was down from December’s booming (upwardly revised) 307,000, other indicators point to strengthening labor market dynamics.
The January ISM Services Employment subindex rose to a stronger-than-expected 52.3, the high since September 2023.
The Services PMI Employment index surged three points to 54.3, the high back to June 2022.
Add recovering manufacturing employment to the booming services economy.
The ISM Manufacturing Employment expanded (50.3) for the first time since May, and Manufacturing PMI Employment rose to the high since June.
The University of Michigan’s preliminary February survey of one-year consumer inflation expectations surged to 4.3% (up from December’s 2.8%), the high back to November 2023.
This followed Monday’s release of the ISM Manufacturing Prices subindex, which jumped to an eight-month high (54.9), while Services PMI prices rose to the high since last September (ISM Services Priced Paid declined to a still elevated 60.4).
February 7 – Bloomberg (Vince Golle):
“US consumer debt outstanding unexpectedly surged by the most on record in December, reflecting massive increases in credit-card balances and non-revolving credit.
Total credit jumped $40.8 billion after a revised $5.4 billion decrease a month earlier, according to Federal Reserve data…
The figure… topped all estimates...
Outstanding credit-card and other revolving debt increased $22.9 billion in December…
Non-revolving credit, such as loans for vehicle purchases and school tuition, climbed $18 billion, the most in two years.”
An overheating economy, coupled with tariff and trade war risks, creates a bond market challenge.
February 3 – Wall Street Journal (The Editorial Board):
“President Trump never admits a mistake, but he often changes his mind.
That’s the best way to read his decision Monday to pause his 25% tariffs against Mexico and Canada after minor concessions from each country.
Mr. Trump claimed victory, as he always does.
He pointed to Mexican President Claudia Sheinbaum’s decision to deploy 10,000 National Guard troops to the U.S. border to fight drug trafficking, especially in fentanyl.
Ms. Sheinbaum... said ‘we had a good conversation with President Trump with great respect for our relationship and sovereignty’…
The two sides will continue negotiating on ‘security and trade,’ and Mr. Trump agreed to pause the tariffs for a month.
Equity markets responded with relief…”
Bloomberg ran with the headline, “Trump Tariff Reversal Feeds Reputation as Trade Paper Tiger.”
Markets took it all in stride, confident that, of course, “Tariff Man” is all bark and no bite.
Colombia, Canada, Mexico – bark, bark, bark.
A flesh wound or perhaps deeper penetration, but I expect the tariff dog begins making his mark next week.
February 7 – Politico (Victoria Guida):
“President Donald Trump on Friday said he would be announcing tariffs next week that match the duties imposed by other countries, in an apparent shift from his previous threat to impose an across-the-board tariff on all imports from across the world.
‘I’ll be announcing that next week, reciprocal trade, so that we’re treated evenly with other countries,’ he told reporters…
‘We don’t want any more, any less.’
Trump, who said the tariffs would apply to every country, added that the announcement would likely come ‘Monday or Tuesday.’
‘I think that’s the only fair way to do it that way nobody’s hurt,’ the president continued.
‘They charge us, we charge them.
It’s the same thing, and I seem to be going in that line as opposed to a flat fee tariff.’”
Reciprocal sounds reasonable and measured.
It gets more interesting when the administration commingles tariffs and taxes, value-added taxes (VAT) in particular.
“All we want is a fair deal.
And there’s a word reciprocal.
I’d go right now, reciprocal tariffs on everybody.
Because many of the countries that you feel so horrible about – the way they’re being treated by Trump...
They charge us tariffs.
The European Union has a VAT (value-added) tax which is through the roof.
Similar thing to a tariff. It’s a VAT. And it’s number like you wouldn’t believe.”
President Trump speaking Monday.
And Friday, from Kevin Hassett, director of the White House National Economic Council, appearing on Bloomberg Television:
“I had my guys a couple days ago just update the numbers I always look at.
And we found that U.S. multinationals had paid foreign governments $370 billion in taxes because of value-added taxes and income taxes in 2023, and foreign multinationals operating in the U.S. paid the U.S. only $57 billion of taxes.
And they have three-times the GDP we do globally – and we’re paying $370 billion and they’re paying $57 billion, and that’s not reciprocal.
That’s something fundamentally different.”
Also from Mr. Hassett:
“The President has stated, as he always does, exactly what he wants.
That’s not like just negotiation.
That’s (tax cuts) what he wants.
And people in the House were able to work with it, and now it looks like there’s a lot of positive momentum after they met with the President.”
My read: President Trump will demand his list of tax cuts be included in “one big, beautiful bill” - to be offset in budget calculations by measures including tariff revenues and tax increases on “carried interest.”
After implementing a measured 10% tariff increase on China and providing a month for negotiations with our neighbors Canada and Mexico, tariff man could be unleashed on Europe next week.
The President believes huge tariff receipts can plug big holes in his budget.
This view will shape a more obstinate approach to trade negotiations.
And I just don’t see a world willing to roll over to his demands.
I’ll assume that determination to push back against Trump’s global power grab rapidly gains momentum.
February 5 – Financial Times (Chloe Cornish, Malaika Kanaaneh Tapper and Heba Saleh):
“US allies across Europe and the Middle East have condemned Donald Trump’s plans for Washington to ‘take over’ Gaza and any attempt to expel Palestinians from the devastated territory.
Countries throughout the region and beyond denounced the proposals within hours of the US president’s shock Tuesday evening announcement that Washington should assume control of Gaza and that its 2.2mn-strong Palestinian population should be resettled.
German foreign minister Annalena Baerbock warned the plan for Gaza… would ‘lead to new suffering and new hatred’.
She added: ‘There must be no solution over the heads of the Palestinians.’
Arab states, which have long rejected any expulsion of Palestinians, were also quick to attack Trump’s proposals.
Saudi Arabia’s foreign ministry said… the country would ‘not establish diplomatic relations with Israel’ without an independent Palestinian state, adding its position was ‘non-negotiable and not subject to compromises’.”
February 7 – Deadline (CBC):
“Prime Minister Justin Trudeau told business leaders at the Canada-U.S. Economic Summit in Toronto that U.S. President Donald Trump’s threat to annex Canada ‘is a real thing’ motivated by his desire to tap into the country's critical minerals.
‘Mr. Trump has it in mind that the easiest way to do it is absorbing our country and it is a real thing,’ Trudeau said, before a microphone cut out at the start of the closed-door meeting.
The prime minister made the remarks to business leaders after delivering an opening address to the summit Friday morning, outlining the key issues facing the country when it comes to Canada's trading relationship with the U.S.”
February 6 – Telegraph (Joe Barnes):
“Nato countries discussed deploying troops to Greenland in response to Donald Trump threatening to use the US military to seize the Danish island.
Germany was among dozens of European allies understood to have held informal talks over ‘what Nato troops would do’ if the US president followed through on his threats, diplomatic sources told The Telegraph.
Questions were even raised over whether Article 5, the Western military alliance’s mutual defence clause, could be invoked in the event of an American invasion of a fellow Nato member state.”
February 6 – Financial Times (Christine Murray and Michael Stott):
“Panama’s president has rejected as ‘lies’ a US statement that the Central American country has agreed to allow American warships to transit the Panama Canal free of charge, escalating a diplomatic battle with the Trump administration.
President José Raúl Mulino said… the bilateral relationship with Washington could not be conducted based on ‘lies and falsehoods’.
‘This is intolerable, simply intolerable,’ he said at a weekly news conference.
Mulino’s comments came a day after the US State Department said that Panama’s government had agreed to stop charging fees for US government vessels passing through the strategic waterway…
‘This saves the US government millions of dollars a year,’ the department said...
‘Why are they making an important institutional statement from the entity that governs the foreign policy of the United States, under the President of the United States, based on a falsehood?’ Mulino asked…”
That foreboding feeling, I suspect, is here for the duration.
I just wonder how this would all be playing throughout the country if the stock market wasn’t right near record highs and the economy wasn't booming.
The President’s base is ecstatic.
Half the country is in shock, coming to the realization that things are likely to be even worse than feared.
Much of the world believes our President is unfit to be the leader of the free world – during a most unsettled and dangerous period.
How long will markets remain so sanguine?
There’s so much riding these days on market Bubbles.
An exuberant marketplace has been willing to believe the disruptor in chief could do his thing without causing serious disruption.
A lot of tariff huffing and puffing, but, in the end, moderation.
Constructive negotiations would minimize trade war risk.
Some campaign tax cut promises would be quietly abandoned.
The isolationist wouldn’t stir up trouble internationally.
And while he would be annoying, Elon with his team of IT nerds surely wouldn’t do anything too crazy.
But we’ve never witnessed such crazy.
It’s been a whirlwind three weeks, and it feels like crazy is being unleashed everywhere.
How long can fragile speculative market Bubbles disregard what’s unfolding?
It’s worth noting that money market fund assets surged another $44 billion last week to a record $6.917 TN, with 28-week growth of $783 billion, or 24% annualized.
There was also another notable surge in the weekly report (CFTC) on Treasury futures short positions, suggesting extreme levered “basis trade” positioning.
A report last week from Barclays referenced a $2.1 TN hedge fund long Treasury position as of last September.
Amazingly, “basis trade” and other levered Treasury trades now total in the Trillions.
And “basis trades” are typically 40- to 75-times levered.
I appreciate that the levered players maintain high confidence that the Fed will ensure Treasury market liquidity.
It must be further comforting to have a seasoned hedge fund operator now in charge of the Department of Treasury – specifically underscoring the administration’s focus on Treasury yields.
But this is a unique environment with a unique medley of risks, including runaway deficit spending, economic overheating, inflation, trade wars, possible Fed tightening and erratic Washington and global policymaking.
It’s just difficult to believe that players are comfortable operating these days neck deep in speculative leverage.
Some seem darn right uncomfortable.
Gold surged to record highs, adding another $63 to end the week at $2,861.
0 comments:
Publicar un comentario