The dollar and yields are on the move on Wednesday and in fairly “big league” fashion as traders appear to be betting that this time they won’t be disappointed by Trump and the GOP when it comes to taxes.
Here’s a chart to give you some context:
10-year yields are at an eight-week high; yields on the 2-year hit their highest since 2008. This of course comes on the heels of Yellen’s “hawkish” speech on Tuesday as well, but clearly, the overnight move is about tax reform.
“Despite headline-driven moves in dollar and U.S. yields, markets may have learned a lesson from earlier this year on buying into tax-reform promises too early,” ING strategist Viraj Patel wrote in an overnight note. Indeed:
Justifiable skepticism aside, the bottom line is that between the talking points from the tax plan and a Janet Yellen that isn’t overtly dovish (that’s the new “hawkish”), the market has the narrative it needs to push up the dollar and yields and as Bloomberg’s Mark Cudmore writes this morning, “a tale of fiscal policy and monetary policy working together to support higher U.S. yields and a stronger dollar,” is one hard narrative to ignore.” More below…
Via Bloomberg
Investors may be suspicious of the Fed’s willingness to raise rates again in December, but this seems like a poor risk-reward time to fight the rise of U.S. yields and the dollar.
- Janet Yellen was consistent in following up last week’s Fed meeting by reiterating that she’s keen to tighten again and isn’t worrying too much about the lack of inflation
- Markets shrugged. Traders aren’t yet convinced by another 2017 hike. Whether it’s because the Fed has lost credibility or just because Yellen is viewed as a lame duck approaching the end of her term, it doesn’t matter — U.S. rates and the dollar show investors aren’t buying what she’s selling
- People are likely to regret this cynicism, at least in the short term. Trump and Republican leaders are set to announce the long-awaited tax overhaul plan on Wednesday. With expectations so subdued, there’s a low bar to impress the market with some concrete details and nice soundbites
- The ability for companies to immediately write off capital expenditure for at least five years is one example of something the market would welcome, even if its ability to survive the legislative process is unknown
- The one-off profit-repatriation tax is also key. The reaction function of companies to different tax levels is still unknown but the dollar is likely to be boosted purely by the topic’s return as a discussion point
- Markets like narratives. And the combination of a freshly hawkish Fed and a potential tax plan is too appealing a story to ignore: it’s a tale of fiscal policy and monetary policy working together to support higher U.S. yields and a stronger dollar
- Never mind that the tax plan will struggle to get through congress and don’t worry that the Fed might be making a policy mistake. Those are issues for another time, not this week
- And dollar traders might want to register that while Janet Yellen’s term is expiring in 2018, she’ll still be firmly in charge for the December meeting. So maybe they shouldn’t be so quick to dismiss her policy views right now
a freshly hawkish fed is good for risk assets? a nebulous tax plan, likely DOA if they announce reduction or elimination of the mortgage interest deduction, or seemingly decrease in taxes on the wealthy….also good for risk assets?
based on stocks’ reseliency, all the ‘good’ things are priced in and anything short of beautiful non-sensical soundbites will disappoint.
how are these wall st bank analysts really saying they can have their cake and eat it too: low rates good for equity markets, rising rates also good. ?? ‘solid global growth’? maybe the words solid and growth have changed meanings and im in an episode of speilbergs twilight zone.