The market is stuck betwixt and between

Outlook

Today we get Dec housing starts and permits, Dec industrial production, and the Nov TICs report, which nobody can read but discloses foreign purchases and sales of US Treasuries. We will get headlines over the weekend. Warning—quite often if there is a drop in foreign purchases of longer-term paper, there is an offsetting gain at the short end. Reporters tend to ignore the short-end and go a bit nuts over any drop in the longer-term with headlines like “dollar losing reserve status.” This is mostly true, but at a far slower pace than headlines would have you believe.

The market is stuck betwixt and between, a surprising degree of uncertainty and indecisiveness ahead of the Trump inauguration on Monday.

As with CPI, whether the retail sales information is good or bad or sort of okay depends on which data method you prefer. The press has mostly a verdict of “solid” growth. The S&P opened higher and the 10-year yield went up by a few points and the dollar index rose by 0.15% in the first 90 minutes. It looked like a return to higher yields and dollar, but then stopped moving up during the day. 

The Atlanta Fed GDPNow update yesterday went from 2.7% on Jan 9 to 3.0%. 

The summary is pretty interesting: Q4 consumption spending rose from 3.3% to 3.7%. Government spending went from 2.9% to 3.0%. But “the nowcast of fourth-quarter real gross private domestic growth decreased from -0.4 percent to -0.8 percent.” We do not know what that means. We get another update today.

An explanation of the drop in yields from Reuters centers on Fed Gov Waller. “… an unusually dovish take from Waller suggested twice as much easing this year than currently priced into futures markets…. With the Fed governor welcoming the week's surprisingly soft inflation report and saying March could not be ruled out for a resumption of rate cuts, Fed funds futures have moved back closer to pricing two rate cuts in 2025 - having doubted any cuts were coming as recently as last week.”

Another downer for yields was testimony from Treasury candidate Bessent, who said the tax cuts are needed to prevent a "calamity" and he supports the strong dollar and Fed independence. He also said default on the sovereign debt would never be considered, which soothed the extreme anti-Trumpers who believed Trump when he said default is always an option.

Forecast

The FX market is still “consolidating” in a peculiar manner ahead of the arrival of the inept and irresponsible Trump. Perhaps the market already fully priced in the calamities he is expected to bring down on our heads. Even gold is softer.

Because Monday is a US national holiday and markets are closed, that leaves FX trading to Asia, the Middle East and Europe. The Trump inauguration is also Monday and Day One when Trump said he will start making big changes. You’d think this would favor yields and the dollar but apparently traders are taking the wait-and-see stance.

Because of this rare combination of circumstances, the forecast has to be for more of the same—consolidative pushback, but not too far. Day Two comes right afterwards and we have been given plenty of warnings. At a guess, the top news on Day Two will be actual capture and deportation if illegals. The guy just loves headlines and spotlights.

We think the markets are wrong to discount the upcoming Trump words and actions. Trump has consistently demonstrated that he cares nothing for rules, whether in law or norms. We can expect nothing else in the coming week. We should not be shocked.

There is a tiny possibility that Trump does not deliver any bombshells in the first few days, in which case the yields and dollar can retreat some more. But we don’t buy it. Tigers and stripes.

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