Last week, it was starting to look like traders had reached peak negativity with regard to government ineptitude.
Of course you wouldn’t have known it from looking at benchmark equity indices. But if you drilled down below the index level, nearly every trade tethered to Trumpian reflation had come off. That led one trader to say that “it might be that the narrative has become so negative that, soon, the only option will be for optimism to increase.” The fact that specs swung to net long in 10Y Treasury futs in the week ended last Tuesday seemed to underscore that point.
Well, that view (that the only option was for optimism to increase) was partially vindicated last night when Congress tentatively agreed on a $1.1t omnibus spending package to fund the government through September 30. “America, fuck yeah!”
“This agreement is a good agreement for the American people, and takes the threat of a government shutdown off the table,” Senate Minority Leader Chuck Schumer said Sunday night in a statement. “The bill ensures taxpayer dollars aren’t used to fund an ineffective border wall, excludes poison pill riders, and increases investments in programs that the middle-class relies on, like medical research, education, and infrastructure.”
Now to be sure, that’s hardly some feat of legislative brilliance and it doesn’t say much for how things are going inside the Beltway when “keeping the government open” counts as a victory. Additionally – and this is important – the bill isn’t a win for Trump. It “rejects most of President Donald Trump’s wish list, including money to begin building a wall along the U.S.-Mexican border,” Bloomberg notes this morning, adding that “GOP leaders eager to focus on health-care and tax overhauls bowed to Democratic demands to eliminate hundreds of policy restrictions aimed at curbing regulations, leaving the Trump administration with few victories.”
No border wall funding, no $18 billion in cuts to domestic agencies, only half of what the White House was looking for in terms of money for the Pentagon, and on, and on. The bottom line, again from Bloomberg, “the compromise resembles more of an Obama administration-era budget than a Trump one.”
That said, the point made here at the outset still applies. This may not be a crowning achievement for Trump, but it does suggest lawmakers will be loathe to avoid absolute policy gridlock. And that (gridlock) is what some Tump trades looked to be pricing in of late. See here for another example.
There was a palpable sense of relief in markets although getting a solid read on things was muddied by holiday-thinned trading in Asia. “The news about U.S. Congress reaching a deal on spending bill changed the mood to provide a boost to USD/JPY, which was already solid,” Yuji Saito, director of foreign exchange at Credit Agricole in Tokyo said a few hours ago.
The risk-on mood was also reflected in gold:
Of course, in a nod to the negativity mentioned above, you should probably curb your enthusiasm. “While the worse case scenario has been averted, Trump’s tax and health-care reforms have yet to be agreed with Congress and will take time,” Wako Ogawa, director of FX sales at Deutsche Securities in Tokyo cautioned. “USD/JPY’s downside may be raised slightly but lacks momentum to chase higher for a while.”
And indeed there are signs that tax reform will be an up’hill’ (get it?) battle. For instance, Senate Democrats have now sent a letter to Treasury Secretary Steve Mnuchin and White House budget director Mick Mulvaney warning about cuts to Social Security and Medicare that the trillions of dollars in estimated revenue losses under President Donald Trump’s tax-cut proposal might engender. “We write to express our concern that your new deficit- exploding proposal to hand out massive tax breaks to millionaires and billionaires will threaten deep cuts to Social Security, Medicare, Medicaid and other middle-class priorities,” the senators wrote, adding that “the proposed 15% tax rate on business income will undermine Social Security and Medicare directly.” So again, curb your enthusiasm.
Quite a few global markets are closed today, but equities were higher in Japan.
We’ll leave you with SocGen’s overnight take:
April PMI data from China, released yesterday, hint at Q1 being the peak for growth in this mini-cycle. Manufacturing came in at 51.2 vs. 51.8 last and non-manufacturing at 54 vs. 55.1. Not a catastrophe but softer than expected. The data have helped give oil prices a marginally soggy feel this morning. In the US, House and Senate negotiators reached a deal for a USD 1.1trn spending bill that could be voted on by mid-week. It isn’t the deal President Trump wanted, and it doesn’t finance a wall, but it keeps the government open and has been cited as the main reason the dollar is stronger this morning.
CFTC data highlights are that the huge GBP post-referendum short has been cut, but only a bit. Hence the further short-covering we saw last week. And the market’s gone from a huge short in 10year Notes to a sizeable long in a handful of weeks. Bond-land has cleared out the bad positions with the fall in yields, and may be set fair for some new range-building and who knows – a look at the top end of whatever that rage proves to be?
Other data of note includes strong Korean exports (+24.25 y/y in April), steady Japanese PMI at 52.7 and strong Australian PMI at 59.2. With large swathes of the world’s markets shut for May Day, this afternoon sees US personal income and consumption, as well as the US ISM and Canadian PMI data.
FAZ, a German paper, wrote up last week’s dinner between UK PM May and European Commission President Juncker over the weekend. Jeremy Cliffe, the Berlin Bureau Chief for the Economist magazine, gave his (damning) summary in a series of Tweets and Frances Coppola, a blogger, transcribed them on the Forbes website. I guess the important takeaway is that M Juncker came away with the impression that the chances of reaching agreement on the terms of Brexit are poor. He called Angela Merkel to tell her as much and she observed to the Bundestag that some in Britain still have illusions. I was pretty bullish of EUR/GBP before I read this, but those positions still working through, and the Euro too, has to get past this week’s hurdle – the French election second round.
On which. The big fear is that turnout will be low. There are an awful lot of left-wing voters in particular, who say they will simply not vote. The consensus view is that this helps Marine Le Pen and while she has been at pains over the weekend to downplay the threat to leave the Euro, a bout of pre-vote market nerves seems inevitable.
Which plays into the hands of the dollar, I suppose. DXY is back up, helped by real yields. We’ve got data today and an FOMC meeting in mid-week (not that I expect anything from that) but if we’ve found a base for Treasury yields, then the dollar too may find it can keep a least a modest bid. I fancy USD/JPY to have a reasonable week, at the same time as I fear a further spike higher in USD/CAD towards 1.40 before the absolute level of CAD becomes irresistible.