Say what you will, but Trump’s big speech to Congress (which is all anyone will be talking about today) could have gone much, much worse.
It would be a stretch to say he “did a good job.” It felt like we were watching a man who had been told, in no uncertain terms, that this was most assuredly not the time to play presidential Mad Libs. “Look man, you cannot f*ck this one up.” I’m fairly certain more than a few people told the President just that going into the address.
Yes, there was an unnerving protectionist slant that, had it come from any other President, probably would have sent global markets reeling, but it was exceedingly tame compared to the normal Trump “stump” (so to speak). Indeed there was only one point where it looked like things might go off the rails, but the President deftly blunted the audible hisses and boos that followed the announcement of VOICE (Victims Of Immigration Crime Engagement) by immediately acknowledging the presence of several Americans in the audience who had lost loved ones to violent crime.
He also seemed to do a fairly good job of keeping expectations alive for tax reform and fiscal stimulus while avoiding the temptation to set the bar too high.
As alluded to above, it’s amazing all the good things that can happen when you stick with the teleprompter and don’t say anything that’s batsh*t crazy.
And indeed it’s a good f*cking thing this turned out ok, because as detailed on Tuesday evening, several Fed speakers had already managed to talk yields, the dollar, and March odds higher after the close, which means that had Trump screwed up, the “reflation frustration” (if you will) would have been that much more acute.
Appropriately, Trump’s speech was the most-tweeted State of the Union or Joint Session address ever with 3m tweets, Twitter said – in a tweet.
So the stage was set for yields and the dollar to remain buoyant and for the global equity rally to continue. And indeed that’s what happened:
Or, more poignantly:
“I think it’s fair to say that the event didn’t cause a lot of volatility,” Tomoichiro Kubota, a market analyst at Matsui Securities Co. in Tokyo, said late Tuesday night .“He mentioned investing in infrastructure, cutting corporate tax, tax on the middle class, but we heard no no specific amount, details. The market will be shifting its focus toward the Fed now.”
“Positions were largely squared ahead of this event and in absence of any negative comments from Trump, USD is underpinned for now by expectations for a Fed rate hike this month,” SocGen’s Kyosuke Suzuki remarked, adding that “with timeline for tax and budget already known, and markets having little expectations for any details to come out of Trump’s speech, focus is turning to a slew of monetary, budget and currency events in mid-March.”
So essentially, the narrative here is that Trump was overshadowed by the Fed, and that’s a good thing for the Trump trade. Essentially this is going to allow yields and the dollar to recouple with the equity rally. As I noted on Tuesday, the reflation correlations are fading and they need to reassert themselves “bigly” if the stock rally is going to continue.
Here’s what SocGen’s Kit Juckes wrote this morning:
The US President’s first address to Congress was long on rhetoric but light on policy detail. He wants ‘renewal of the America spirit’ while Wall Street wants details of tax cuts and spending increases. Meanwhile, San Francisco Fed President John Williams said he can’t see a need for a delay in hiking rates (though he isn’t an FOMC voter at the moment), and New York Fed President Bill Dudley was telling CNN that the case for tightening has become a lot more compelling in recent months. That has triggered a sharp re-pricing of the chances of a March rate hike. If the Fed likes to have the market price a move in before they act, they have now cleared themselves a path, with odds of 80% implied by Fed Funds futures.
In Asia, the yen weakened against nine of its G-10 peers. “USD/JPY advanced as much 0.7% by the early European hours after Trump’s speech contained no surprises and investors shift their focus back on the probability of Fed rate hike later this month,” Bloomberg wrote, underscoring the rate differentials argument for a stronger USDJPY.
“Downside concerns for the dollar in general have subsided due to Fed expectations,” the abovementioned Kyosuke Suzuki noted.
This is a big relief. The yen had been marginally bid recently, which was especially concerning for the equity rally. It’s the same “what does X know that stocks don’t?” argument. When you see havens bid and risk bid simultaneously, someone’s wrong. This time around, it looks like risk (stocks) were right. If only accidentally.
“The yen was already weakening this morning on [the Fed speakers], and in all honesty, today’s gains in Japanese shares aren’t entirely on the Trump speech. More than half is due to the yen’s move and increased expectations of a March rate hike,” Ryuta Otsuka, a strategist at Toyo Securities Co. in Tokyo observed.
Needless to say, JGB’s fell as yields rose across curve. “Heightened expectations for Fed rate increase this month are weighing on JGBs,” Takafumi Yamawaki, chief rates strategist at JPMorgan said, adding that “focus is on speeches by Yellen and Fischer scheduled Friday and U.S. jobs data next week.” The BoJ’s decision to release a schedule of upcoming JGB purchases might have kept yields from rising further.
As tipped above, the Nikkei rose sharply on yen weakness and other Asian equities followed suit.
- Nikkei up 1.4% to 19,393.54
- Topix up 1.2% to 1,553.09
- Hang Seng Index up 0.2% to 23,776.49
- Shanghai Composite up 0.2% to 3,246.93
- Sensex up 0.9% to 28,990.65
- Australia S&P/ASX 200 down 0.1% to 5,704.80
- Kospi up 0.3% to 2,091.64
Things were equally – if not more – ebullient in Europe, as shares rose across the board:
- FTSE 7335.25 71.81 0.99%
- DAX 12000.85 166.44 1.41%
- CAC 4931.48 72.90 1.50%
- IBEX 35 9695.60 140.10 1.47%
In the US, stocks look set to open notably higher after the Dow snapped its historic winning streak on Tuesday to close out the month. Here’s the full econ docket:
- Wards Total Vehicle Sales, est. 17.7m, prior 17.5m
- Wards Domestic Vehicle Sales, est. 13.7m, prior 13.6m
- 7am: MBA Mortgage Applications, prior -2.0%
- 8:30am: Personal Income, est. 0.3%, prior 0.3%
- 8:30am: Personal Spending, est. 0.3%, prior 0.5%
- 8:30am: Real Personal Spending, est. -0.1%, prior 0.3%
- 8:30am: PCE Deflator MoM, est. 0.5%, prior 0.2%
- 8:30am: PCE Deflator YoY, est. 2.0%, prior 1.6%
- 8:30am: PCE Core MoM, est. 0.3%, prior 0.1%
- 8:30am: PCE Core YoY, est. 1.7%, prior 1.7%
- 9:45am: Markit US Manufacturing PMI, est. 54.5, prior 54.3
- 10am: ISM Manufacturing, est. 56.2, prior 56
- 10am: ISM Prices Paid, est. 68, prior 69
- 10am: ISM New Orders, prior 60.4
- 10am: ISM Employment, prior 56.1
- 10am: Construction Spending MoM, est. 0.6%, prior -0.2%
- 2pm: U.S. Federal Reserve Releases Beige Book
There are a few Fedspeakers (of course) and we’ll also get a look at the
always boring Beige Book:
- 1pm: Fed’s Kaplan Speaks in Dallas
- 2pm: U.S. Federal Reserve Releases Beige Book
- 6pm: Fed’s Brainard Speaks at Harvard