There have been a lot of attempts recently to try and discern how much of the blame for falling yields and the flagging dollar can be placed at the feet of WrestleMania contestant and man who they let do it only because he’s a star, Donald Trump.
What makes these efforts so amusing is that some of them center around trying to explain how the dollar isn’t really a measure of the world’s confidence in Donald Trump. Of course as is the case with almost all arguments aimed at defending Trump, that contention has been vociferously refuted by none other than Donald Trump. Recall this from an April interview with WSJ:
I think our dollar is getting too strong, and partially that’s my fault because people have confidence in me.
So either Trump is a genius and has been fucking up at every turn intentionally in a behind-the-scenes effort to engineer the kind of dollar weakness he always wanted by way of feigned buffoonery, or else he’s fucking up by accident and the dollar has a been a casualty.
You can draw your own conclusions there, but it is worth noting that as long as he doesn’t tweet anything crazy for the rest of the day, the dollar looks like it mike eke out a gain this month for the first time since Trump explained how we should use the greenback to measure “people’s confidence in me.”
Well in the same vein, Goldman is out with a piece on Thursday that implicitly asks the same question Cameron Crise asked on Wednesday. Namely: is all the bad news now priced in? For those who missed Crises’s post, here’s an excerpt:
To be sure, the risks sketched out in the earlier column remain, and they are one of the reasons that it makes sense for the market to price less tightening than the Fed projects in their infamous dot plots. That’s particularly the case given the uncertainty over who will lead the Fed in 2018 and beyond. Still, the gulf between “pricing less than the dot plot” and “pricing almost no tightening” is still pretty wide.
Ok, so that brings us to the above-mentioned Goldman note. Essentially, the bank has quantified what we can expect in terms of 10Y yields for a given change in Trump’s approval rating. To wit:
Our Washington economist argues the continued decline in President Trump’s approval rating has increased the risks around the legislative agenda. If President Trump’s approval rating is directionally correlated with the chances of passing pro-growth legislation, higher approval ratings and better economic data should both imply a higher 10-year yield. Roughly speaking, the coefficient on the approval rating implies that a 1pp increase in President Trump’s approval numbers would increase the 10-year yield by 3bp. Put differently, had President Trump’s approval rating remained constant at 45% since January, we would expect the 10-year yield today to be around 2.40%.
If you think about it, that is all kinds of funny.
Because what it suggests is that in the immediate aftermath of the election, yields rose on news that Donald Trump was set to become President in January.
Then, starting pretty much immediately after the inauguration, yields fell on news that Donald Trump actually was President.
As Goldman dryly says about the chart shown above, “the pattern visible in Exhibit 1 is heavily influenced by the downward trends in both variables.”
Anyway, the bank’s point is to say that perhaps there’s nowhere to go but up from here:
With 10-year yields and Trump’s approval ratings both hovering near their lowest levels since the election, markets may now be over-pricing the risk of a government shutdown and further delays on tax legislation. In the aftermath of Hurricane Harvey, the government will likely need to appropriate disaster relief funding in coming weeks, making a shutdown less politically desirable. Therefore we now see just a 35% chance of a brief shutdown versus 50% previously. And while we have yet to see concrete signs of progress on tax legislation, we continue to believe a tax cut is slightly more likely than not as congressional Republicans are independently motivated to pass some type of tax legislation to avoid entering the midterm election without any substantial legislative accomplishments.
Given how negative sentiment on the political outlook has become, it’s feasible this sell-off in the 10-year could originate with a positive surprise from the policy process.
Mmmm, hmm – I see.
I would gently suggest that current Goldman employees have yet to learn the lesson that former Goldman employee Gary Cohn learned the hard way a couple of weeks ago when a press conference he thought was about infrastructure abruptly turned into a scene from Ashley Schaeffer’s dinner table …