Good morning … ‘golden age’, take 2…still waiting for HIMCO Q4 writeup and while that IS going to be worth the wait, I’m quite certain, today’s note, well, not so sure. Looking back not to Q4, but rather just yesterday as global markets celebrate DJT2.0 …
ZH: Stocks, Bonds, Gold, & Crypto All Surge Higher As Trump Takes Office
20yy DAILY: back below 5% (psychologically funTERtaining) ‘support’ with rising TLINE ‘resistance’ closer to 4.65% which then makes current level close TO middle of this range (4.825%) …
… this, with momentum becoming more overBOUGHT by the day, not sure how much lower yields can / should go but without anything standing in way (save for supply, which is said to, on occassion, to create it’s own demand), all leaves me more cautious and wanting more (concession, ie dipORtunity) than lookin’ to buy high and sell higher …
AND … here is a snapshot OF USTs as of 620a:
… for somewhat MORE of the news you might be able to use … a few more curated links for your dining and dancing pleasure …
NEWSQUAWK: US Market Open: NQ bid after Trump’s AI investment, NFLX +15% post-earnings, a softer Dollar is supporting oil/precious metals … USTs are a little firmer, Bunds bounce on ECB Lagarde remarks, who is seemingly not too concerned about US tariffs at this point in time … USTs are awaiting fresh tariff updates from US President Trump. Overnight, Trump spoke about potential measures on China and the EU. As it stands these remain hypothetical with the President yet to initiate measures though the February 1st date he continues to reference is moving ever closer. USTs are firmer by a handful of ticks and have been moving directionally with EGBs (see Bunds) in the European morning. Holding at the upper-end of 108-19 to 108-28 bounds, with yields lower across the curve which itself is flattening very modestly.
Opening Bell Daily: 2021 levels of optimism … Investors haven't been this bullish on stocks since 2021 … Cash allocations have tanked while fund managers deploy capital into equities.
Finviz (for everything else I might have overlooked …)
Moving from some of the news to some of THE VIEWS you might be able to use… here’s some of what Global Wall St is sayin’ … some of this was supposed to be included yesterday but whats that saying … better late than never? Here goes …
Treasuries were solidly bid on Tuesday as the market responds to Trump’s return to the Oval Office. It’s been a bull flattener. To some extent, one could argue that this is simply a modest retracement of the bear steepening that has represented the ‘go-to’ Trump trade in the US rates market. While we are unquestionably on board with the bounce in Treasuries, there remains the lingering question: how far can the price action reverse in light of the inflationary angst that brought the market to the yield peaks seen last week? While the benign core inflation figures bode well for the Fed’s efforts to reestablish price stability, CPI doesn’t measure future, Trump-linked inflation. Hence our underlying concern that while the market might still have further to retrace, there is only so much bond bullishness to be realized until the market settles into a holding pattern…
Drill baby, you say …
BNP: Crude lacks direction; we expect the market to settle down in Q2
Crude’s bullish start to 2025 has been amplified by the Biden administration’s stronger than expected tariffs on Russian crude.
We believe the current sanctions will be more disruptive than the previous ones given their minimal notice, shorter wind-down period and broad scope. We also don’t believe the Trump administration will unwind these soon.
We acknowledge the short-term upside from weather and consumers bidding up the price for replacement barrels, however we believe the demand reduction (from refinery maintenance and weakened Chinese sentiment after the Trump administration’s tariffs) will outweigh this from February onwards.
In Q2 we expect crude markets to settle down as we don’t see an incentive for the Trump administration to significantly restrict Russian and Iranian exports simultaneously, while we expect more OPEC+ barrels if crude prices would increase furthe
WTI oil appears overbought by 1.7 z-scores (6.5%) according to BNP Paribas MarFA™ Macro (Figure 1). We add a short trade idea to our Quant Trades of the Week portfolio.
We target MarFA™ latest fair value of 71.59USD/bbl for the March ‘25 contract, with a USD18m notional. Entry at 75.63USD/bbl and stop at 79.53USD/bbl.
AND about dislocations avail for us all to review and place some chips …
…1. Markets are pricing in Fed rate cuts this year, even though they’re also pricing inflation that lingers above the Fed’s target.
… 2. UK markets have seen a strange divergence across different asset classes: gilts and the pound sterling have underperformed in recent months, yet sterling IG spreads are around their tightest since the global financial crisis…
…3. Markets don’t believe that President Trump is going to be as aggressive on tariffs as he’s pledged, even though he’s pushed back against reports of going softer and the first term demonstrated how the more aggressive trade policies weren’t implemented until the second or third year…
…4. US equity valuations have never been this high with growth this weak. The last time we saw the CAPE ratio this high (in the late-90s and 2021), US growth was running at an annualised pace above 4%.
…5. In Japan, inflation has been above target since April 2022, and the consensus expects a further rise in this week’s CPI release, up to +3.4%. The Bank of Japan are also in a hiking cycle, yet the country’s 5yr yield is only at 0.84%…
And speaking of elephants (‘golden age’ reference there) …
First Trust: The 60/40 Model and The Elephant in the Room
… The elephant in the room is the sheer size and growth of the federal government. Especially redistribution. In 1965, the year Lyndon Johnson pushed through the Great Society programs, non-defense government spending was 9.5% of GDP. By 1973, it had climbed to 12.5%. It was 15.2% in 2007, 17.5% in 2016 and today it is 20.4%. This growth is astounding.
Think of it this way…if we invent a new technology that grows our output by 10% through greater efficiency, that is basically equal to what the government is taking (20.4% - 9.5%) each year to redistribute as they see fit. Taxation and redistribution rob the benefits of innovation. Yes, of course technology has made us more productive, so why isn’t growth stronger? The answer: excess government spending…
…This brings us to the 60/40 investment model. For a very long time (maybe centuries) investors have known that diversification lowers risks. At one point a formula for stocks versus bonds was to take 110 minus your age and put that percent into stocks. The older you are the fewer stocks. Some simplified this approach and used a 60% stock and 40% bond portfolio.
But, in the past decade, this approach has hit the wall. After performing well – limiting volatility, while providing solid returns – it fell apart. If you search the web for 60/40 investing, you will find story after story about how this strategy just doesn’t work anymore. The question is: Did it stop working because it is fundamentally flawed or did it stop because it was a fad …like stocks doing well in a year an NFC team won the Super Bowl, or “sell in May and go away”?
There is a reason…and that reason is that the Federal Reserve has destroyed it. In 2008, with the advent of Quantitative Easing, the Fed was given the power to pay banks interest on excess reserves (IOER)…
…What’s wrong with the 60/40 model is that the Fed broke it because it wanted to help fund massive government spending at artificially low interest rates. There is no real monetary policy justification for this. Sure, the Fed will say the old system was fragile. But their system is top-down management. Big government is the problem. The Elephants in the room were all built by government. Fixing that would give the economy a chance, and return sanity to the markets.
Stay long, young man … stay long (this in addition to those buyers of 5s noted) …
The next ECB cut is virtually a done deal, but markets will be listening to upcoming speakers for guidance about the landing zone. Meanwhile, price action in US Treasuries remains biased in a positive direction, and we maintain a tactical long positioning
Sometimes you don’t NEED much more than a couple words to describe Day 1 …
Choppy moves in DXY amid expectations around tariffs; downside surprise in Canada CPI; gilts rally as unemployment rate rises; USTs bull-flatten as oil prices fall; strong 40y JGB auction; MXN underperforms; DXY at 107.96 (-0.5%); US 10y at 4.576% (-5.1bp)
… stock jockey’s everywhere watching rates and sensitivity …
Rate sensitivity remains the key for index performance as evidenced by the risk-on price action post last week's light CPI report and drop in yields. A sustained decline in the term premium is likely needed to change this dynamic. We reiterate our constructive stance on Financials.
Same shop with a more rates/SUPPLY-focused note …
MS: Cross-Asset Flows and Allocations: The Big Issue – 2025 Global Fixed Income Supply Outlook
Fixed income net issuance could be lower than markets expect, even as refinancing a large maturity wall and debt funding for M&A activity drive supply higher. We walk through our 2025 global fixed income issuance forecasts, and argue that markets can digest bond supply.
Key takeaways
We see global fixed income gross supply rising by 6%Y to US$12.5 trillion in 2025.
We expect US Treasury gross supply of ~US$4.0 trillion in 2025, up ~2%Y. Net issuance comes in at ~US$1.8 trillion, down ~3%Y.
Agency MBS to see US$210 billion of net supply, with aggregate bank demand similar to 2024.
DM IG issuance to rise, driven by a sharp increase in maturities, an uptick in deal-making, and a healthy earnings outlook.
We expect sovereign hard currency gross issuance to decline slightly to US$188bn, as some larger 2024 issuers reduce issuance and others regain market access.
For those of us still tryin’ to get our arms ‘round Day 1 …
WELLS FARGO: Meet the New Boss, Same as the Old Boss: 25% Tariffs?
Summary Despite a flurry of executive action on President Trump's first day in office, tariffs were not on the menu, at least not the first course. The president did threaten to levy 25% tariffs on Mexico and Canada by February 1. In this note we break down the U.S. trade relationship with our neighbors and offer initial thoughts on the potential economic implications of such tariffs.
SAME SHOP and for those feelin’ around in the dark, tryin’ to figure what the Fed’s saying and doin’ …
WELLS FARGO: January Flashlight for the FOMC Blackout Period
Summary
The FOMC cut its target rate for the federal funds rate by 100 bps between September and December. However, a pause in its easing cycle seems like a done deal when the Committee meets next on January 29.
Not only has the economy entered 2025 with a solid head of steam, but progress on returning inflation to the Fed's target of 2% has been painfully slow in recent months. Therefore, many FOMC members seem to question the need for further policy accommodation at this time.
The FOMC is not scheduled to release a "dot plot" at the conclusion of the meeting, so it will need to signal any policy intentions it wishes to give via the post-meeting statement and Chair Powell's press conference. We expect the FOMC will make only modest tweaks to its post-meeting statement. We also believe Chair Powell will continue to indicate that the Committee is not on a preset course, and that future policy moves will depend on incoming data.
Looking forward, we expect the FOMC will maintain its target range for the federal funds rate at 4.25%-4.50% through the first half of the year. We have penciled in a 25 bps rate cut at the September policy meeting, and a similar-sized reduction in December. We then look for the FOMC to remain on hold at 3.75%-4.00% throughout 2026.
That noted, the FOMC's policy actions in coming months will be dictated in part by policy choices, especially related to tariffs, that the Trump administration makes. In our view, uncertainty related to the new administration's economic policy imparts uncertainty onto the outlook for monetary policy.
We have pushed back our forecast for the end of quantitative tightening (QT). We now expect the FOMC will announce the end of QT at its May meeting, one meeting later than our previous forecast. We look for balance sheet runoff to cease at the beginning of June, although MBS runoff likely will continue, with mortgage paydowns replaced one-for-one with Treasury securities.
While most everyone in Switzerland is in DAVOS for the WEF, some are not, and are merely writing …
UBS: UBS Morning audio comment: Threats and freezes
UK government borrowing rose in December. Higher interest payments on inflation-linked debt were a significant part of this. Inflation-linked debt is currently tied to the retail price measure (this will change at the end of the decade. Higher energy prices—themselves a function of government policy—can raise interest payments via inflation.
The World Economic Forum at Davos allows policy-makers to pontificate (and for economists to write blogs). ECB member Knot suggested markets were rightly assuming January and March rate cuts, but was not advocating an accommodative policy.
US President Trump suggested a 10% tax on US consumer of goods from China, starting on 1 February, in addition to threats of 25% import taxes on goods from Mexico and Canada. Rather than follow every threat (which may not be realized), the basic issues are: every 10% tariff is likely to directly raise US consumer prices by 4%; second-round effects (less competition, profit-led inflation) are bigger inflation threats; and selective tariffs can be avoided (up to a third of China’s exports to the US reroute).
Trump froze around USD 300bn of infrastructure spending. Short-term uncertainty over this funding is a mild growth negative. Over the longer term, it is likely to be redistributive (money is spent on lawyers arguing, rather than building infrastructure).
AND some further WISDOM from Mr Stocks for the Long Run …
WISDOMTREE Professor Siegel Weekly Commentary: Inflation Tames, Economy Gains: A Resilient Start to 2025
… In the bond market, the 10-year bond yields retrenched from 4.80% to 4.60% following the inflation data. I still believe the 10-year yield could surpass 5% in the coming months. The resilience of the equity market, driven by the celebration of lower inflation and the lower yields, has been notable. Growth stocks, particularly the mega-cap technology names, continue to dominate, with no signs yet of a sustained rotation into value sectors. Despite occasional narratives of portfolio shifts, the dominance and trendlines of tech and growth indexes remains intact, bolstered by optimism surrounding artificial intelligence …
Finally, if you think about the high / rising USD, you may wonder who’s buying and why, and if you are, this next note offers some answers and attempts to connect some dots …
YARDENI: Foreigners Buying Lots of US Dollars To Buy Lots of US Stocks & Bonds
The stock market rose today, buoyed by the fact that President Donald Trump didn't raise tariffs on Day #1 of his second term as was widely expected. Instead, he will be raising them on Canada and Mexico on Day #13 (February 1). That's what he said Monday evening. Stocks also got a boost when Trump announced today that Softbank, OpenAI, and Oracle are forming a $100 billion joint venture to fund AI infrastructure. After the market close, Trump said his team is talking about a 10% tariff on China, not 60% as he had been saying when he was on the campaign trail.
Meanwhile, the price of a barrel of Brent crude oil dropped 3.3% since January 15 because, as expected, Trump signed lots of executive orders on Day #1 to enable more oil and gas production in the US.
The dollar edged down on Monday following the unexpected delay in tariffs (chart). However, it should rebound if foreign investors continue to be significant buyers of US bonds and stocks, as we expect. They and domestic investors have less to fear right now about monetary policy and inflation in the US. In addition, a US debt crisis doesn't seem to be imminent. Nor does a spike in oil prices caused by a geopolitical crisis.
These have all been concerns hanging over the market in recent weeks. They did cause a pullback in the stock market since early December, as we expected. However, now the path of least resistance is up, especially if the Q4-2024 earnings reporting season continues to go as well as we expect, with a gain of 12.0% y/y.
We also expect that foreign investors will continue to pour funds into the US capital markets…
… And from the Global Wall Street inbox TO the WWW … a few curated links …
From the makers of just ‘bout EVERY ETF we travel in …
Long-term bond yields have jumped as markets have embraced our previously contrarian high-for-longer view. But it doesn’t necessarily spell pain for stocks.
U.S. stocks rose 3% last week, helped by tech gains, as Q4 corporate earnings kicked off. Soft U.S. and UK CPI sent bond yields tumbling from recent highs.
We expect the Bank of Japan to hike rates this week as it carefully normalizes policy. We watch for currency moves and any global ripple effects that follow.
…Bottom line: We think bond yields can keep climbing over the long term, so we stay underweight long-dated U.S. Treasuries. We prefer short-term bonds for income and euro area over U.S. credit. We stay risk-on and expect earnings to fuel equities…
"All the Elephants in the room were created by Government". Now that's speaking Truth to Power!!!
Careful now people, reading that WEF editorial link could cause one's head to EXPLODE