Markets are coming off a shaky week, which sets the stage for … I don’t know, something. Or maybe nothing. Because this is a market where “something” always mean reverts to “nothing.” And in increasingly rapid fashion as any attempts to form a long-term view quickly prove fruitless in the face of the mass myopia engendered by a regime that optimizes around the prevailing dynamic, perpetuating low vol. and enabling bad behavior.
That said, the prevailing order faces a burgeoning existential threat in the form a worsening junk bout rout that seemed to come out of the clear blue last week. So far, equities have held up reasonably well – or at least if what you’re looking at is the Nasdaq:
Over all, yields leapt to 3-month highs and notably, single-B yields jumped to 6-month highs on Thursday:
Market participants have cited a veritable laundry list of concerns ranging from jitters about what the tax plan will mean for interest deductibility, uncertainty around the Fed (heightened by news that Bill Dudley is on his way out the door), and generalized angst about whether the market is too rich and may be disconnected from fundamentals late in the cycle. Long story short, here’s the problem:
So we’ll see how that sorts itself out this week.
The dollar is coming off its first losing week in four as investors attempt to read the tax bill tea leaves.
Here’s Barclays with a bit of color on the greenback:
USD momentum stalled after the Senate Finance Committee presented its own version of the tax cut bill. It has marked differences from the House version, including the complete elimination of state and local tax deductions, which many GOP Representatives from highly taxed states oppose. As such, it sets the stage for a difficult consolidation process and brings additional uncertainty to the fate of the tax plan. The recent supports for the dollar, in the form of expectations of a hawkish Fed chair and meaningful tax reform, have been removed, and upside for USD appears limited. The dollar is likely to ebb and flow with news about the tax cuts and other legislative priorities (eg, government funding), but most of the good news seems to have been already incorporated. The House floor could vote on its version this week, while the Senate version will be in the committee stage.
Do recall that 10Y yields did get back above 2.40 on Friday:
So that’s the setup for CPI on Friday which will be closely watched especially in light of the recent underwhelming AHE print. Here’s Goldman’s quick take:
CPI: GSe +2.04% yoy, consensus +2.0% yoy, last +2.2% yoy. We estimate a 0.20% increase in October core CPI (mom sa) and we expect the year-over-year rate to remain stable at +1.74%, though risks are skewed to the upside. Our forecast reflects stronger new car prices and a rebound in the lodging away from home category. On the negative side, promotions from wireless carriers could weigh on the communications category. We estimate a 0.10% increase in headline CPI, primarily reflecting a drag from energy prices, leaving the year-over-year rate two-tenths lower at 2.2%.
And then there’s this, which has the potential to be all kinds of amusing:
So that’s the official ECB calendar entry for what promises to be a super-fun panel discussion featuring Yellen, Carney, Draghi, and Kuroda who will be bringing the jokes and the smiles to help lighten the mood and remind everyone not to take themselves too seriously.
Carney will be front and center for obvious reasons. “We expect a hawkish stance from Carney to prompt a repricing of BoE Bank Rate expectations and support GBP this week,” Barclays writes, in their week ahead preview, adding that the BoE seems disappointed in the market’s reaction to the November hike. On the other hand, Bloomberg reminds you that “GBP downside risks are building after The Sunday Times said 40 Conservative members of Parliament, almost enough to trigger action, have agreed to sign a letter of no confidence in Theresa May.”
But I guess the joke in the whole thing is that the event is called “Communication challenges for policy effectiveness, accountability and reputation” and the irony there is that the market will invariably be moving on whatever everyone says. So this is yet another manifestation of radical transparency and central bankers implicitly consulting with the market only in this case, they’re actually engaging with the market via a panel discussion about engaging with the market.
And of course there will be no shortage of headlines out of the Mideast. The Saudis have been intervening in the equity market…
…but CDS is blowing out and there’s a regional bond rout brewing. So it’ll be interesting to see just how much trouble market participants price in.
Also, keep an eye on retail sales, FAI and industrial production out of China. Those are always on everyone’s radar and now that the Party Congress is out of the way, folks will be anxious to see how the data comes in.
Oh, and don’t forget, Donald Trump is still President…
Full calendar via BofAML