Anxiety over Trump’s arrival

Outlook

We do get some useful data this week—housing data, regional Fed surveys, and several PMU’s, but the good stuff comes next week. Market-movers include ADP, payrolls, JOLTs and the minutes from the Dec Fed meeting. Anxiety over Trump’s arrival on Jan 20 will be building.

We continue to worry about the high 10-year yield, already over the 4.65% suggested as a top. The high this year is a whisker under 4.74%. We do not know how vulnerable it is to a further downward correction, which would imply a change in demand. Where would such a change come from?

One of the more important consequences of rising US yields is the widening differential with Japan, where the central bank has yet to convince traders it’s on the way to hikes. In the absence of a definitive statement, the yen remains vulnerable. As it nears 160 again, we are sure to get louder threats of intervention.

The Fed remains front and center in all the discussion going forward. Last week we saw analysts attributing the rebound in the pound and euro to new questions about the trajectory of rate cuts. Cuts had been baked in but some question whether rate-cut support for those economies trumps the currency consequences.

That reminds us that the only way the Fed can plausibly keep cutting rates is if it sees a dip in inflation and/or a severe slowdown in the economy that would imply inflation relief. The most recent Atlanta Fed GDPNow has growth at 3.1% for Q4 and we get a revision on Thursday. The NY Fed has a level closer to 2% for next year.

Tidbit: While the drama over the government shutdown has been silenced for the moment, on Friday TreasSec Yellen warned Congress that the debt limit needs to get raised by Jan 14 or she will have to use “extraordinary measures” to prevent default.

We fail to understand why this is not front-page news. It shows a lack of respect for debt limits, which do indeed merit scorn but matter tremendously, anyway. Yellen wrote “I respectfully urge Congress to act to protect the full faith and credit of the United States.,”

The debt limit is a stupid idea the way it was designed in the US. (The European Union version is better but still violated, even in strict Germany.)  The TreasSec favors getting rid of it, probably the only time she and Trump are on the same side. One report notes that Trumps’ former TreasSec Mnuchin said in 2017 it’s a ridiculous concept that doesn’t work to limit spending.

At a guess, Trump will be able to shove the Republicans into giving up the debt ceiling (invented by them in the first place) and enough Dems will go along. Then we have a different problem—Trump’s proclivity for spending well beyond his means.

This implies no real change in yields, or even a rise in yields as Trump’s deficit spending aims for the moon. 

Forecast

The last time we had a bounce, it rose above the 20-day. This time the 20-day lies at 1.0467. Since we have to see what US traders do today and still have another day to go for the year to end, it could well surpass that. But we do not expect to see the euro reach  the round number 1.0500. Longer-term, the dollar still has a strong tailwind.

Tidbit: Reuters reports that China imported more than double the amount of gold in Nov as in Oct and the highest in 7 months, a net 33.074 metric tons from 15.414 ton—or 115%. 

This looks like resumption of gold buying after a pause China. “China is the world's leading consumer of gold.” Some may be headed for reserves. Consumers buy gold for jewelry (and savings), especially ahead of the late Jan holiday. “The Hong Kong data may not provide a complete picture of Chinese purchases, as gold is also imported via Shanghai and Beijing.”

“Spot gold has gained around 27% so far this year, hitting a record high of $2,790.15 on Oct. 31 on the back of U.S. Federal Reserve's interest rate easing and escalated tensions around the globe. However, prices fell 3% in November after a post-election sell-off driven by Donald Trump’s win.”

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