Make Yield Curves Inverted Again! As 3M-10Y Goes Negative, Trump Assails Fed

First thing Friday, we brought you a clip from Donald Trump’s 400th (roughly) exclusive interview with former CNBC “money honey” (and current woman who wasn’t amused when Trump called her “fake news”) Maria Bartiromo.

As alluded to there, Trump became angry with Maria when the normally sycophantic Fox anchor pressed him on his ongoing criticism of the late senator John McCain. At one point, Trump called her “fake news”, to which she responded “No. It’s not fake news. You just told me.”

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‘No. It’s Not Fake News’: Maria Bartiromo Finally Loses It With Trump

According to Trump (and if you watch the clip embedded in the linked post above, he actually says this), Maria “wasn’t supposed” to ask about McCain, but one thing she most assuredly was “supposed” to ask about was the economy.

Trump is pretty proud of what he insists is world-beating, historic economic growth in America, despite the fact that while US economic growth was indeed impressive in 2018, it wasn’t world-beating and it wasn’t historic (sorry, it just wasn’t).

Perhaps because he knows his contention that the US economy is “the best it’s ever been” isn’t actually true (or at least not by many measures), Trump isn’t satisfied with the current rate of expansion, which is a tough spot to be in because things are invariably going to decelerate from here.

But not if you ask the White House, according to whom the economy will continue to fire on all cylinders. In fact, the president’s budget contains a set of entirely unrealistic economic projections (see here and here).

Specifically, the budget assumes the economy grows at an average 3% annual rate over the next decade (3.2% in 2019, 3.1% in 2020 and 3% in 2021).

Again, that isn’t even close to realistic. Here are two handy charts from Goldman which show you just how far out of whack those figures are with Wall Street’s projections:



And look, it’s not just Wall Street desks who think the White House’s projections are far-fetched. The Fed too doesn’t consider those “estimates” realistic. Here’s the latest SEP from the March meeting:


During his post-meeting presser, Jerome Powell was asked specifically about the disparity between the Fed’s projections and the White House’s numbers. He politely deflected.

If you ask Trump, the only reason the economy didn’t grow at a faster pace in 2018 is because Powell continued to hike rates and proceeded with balance sheet runoff. That is some semblance of true, although Trump never mentions (probably because he doesn’t fully understand the dynamic) that one of the main reasons the Fed was forced to lean more hawkish than they otherwise might, was because the tax cuts and fiscal stimulus threatened to overheat an economy that was already running hot. Simply put, you generally don’t pile deficit-funded tax cuts atop a late-cycle dynamic when unemployment is at a five-decade low. That’s fiscal insanity and everyone knows it.

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Red Ink: The Politics Of Fiscal Insanity

Trump went the Erdogan route last year, lambasting the Powell Fed on too many occasions to count. By the end of December, markets were concerned he might actually move to fire Powell after he (Trump) took the highly ill-advised step of shrieking about the Fed chair’s golf game on Twitter, leading directly to the “Christmas Eve massacre” on Wall Street.

The Fed’s dovish pivot in 2019 and concurrent rebound in markets should have been enough to shut Trump up, but alas, he continued to assail the central bank during his wild CPAC harangue earlier this month.

Well, during his interview with Bartiromo, Trump weighed in on the WTO, the economy and the Fed. Here is the clip:


Ok, so allow us to point out a few things there. First of all, note how Trump says that the US “never won cases” in the WTO. He has of course habitually tilted at the WTO windmill, and at one point last year, rumors that he was set to pull the US out prompted severe consternation in markets.

But, here’s the thing: Trump is lying there, and “big league.” He just said, on national television, that the US “never wins cases” at the WTO. Here’s the reality, from The “Economic Report of the President”:

The United States has won 85.7 percent of the cases it has initiated before the WTO since 1995, compared with a global average of 84.4 percent. In contrast, China’s success rate is just 66.7 percent. Most U.S. WTO cases target China (21) and the European Communities (19). When the United States is the respondent, it still wins 25 percent of the time, a rate that is better than the global average rate of 16.6 percent(Mayeda 2017). In comparison, the EU and Japan have won 0 percent of the cases brought against them, while China has won only 5.3 percent of the time (Mayeda 2017).

And just who signed off on that report, the skeptics/Trump fans among you might well ask? Well, I’m glad you’re curious and I’m happy to answer that via the following screengrab from page 11:



As far as his comments about the US economy, America does not “have tremendous momentum right now.” This is another one of those times when Trump has inadvertently torpedoed his own credibility when it wasn’t necessary. There are all kinds of good things you can say about the US economy, especially relative to the rest of the world. But one of those things is most assuredly not that “we have tremendous momentum.” “Momentum” has slowed, and it’s going to continue to slow because, ironically in this context, the fiscal impulse from Trump’s stimulus is waning.

Further, note how he says that “the earnings are great.” That was true – was. And while I guess it depends on your definition of “great”, what absolutely isn’t going to be “great” this year is earnings growth, if for no other reason than comping against last year’s tax-cut-fueled bonanza is hard.


(Morgan Stanley)

As you can see, corporate profits are set to shrink in Q1 and at this point, we’re all counting on a “hockey stick” inflection in Q4 to save the day, something more than a few analysts think is a dicey thing for investors to hang their hats on.

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Unlike Morgan Stanley, Goldman Isn’t Too Worried About An Earnings Recession

‘False Alarm’ Or Will An Earnings Recession Cause A ‘Real’ Recession?

Finally, as to whether Trump “influenced” Powell’s dovish pivot (which has now been roundly criticized by all manner of folks for being a blatant capitulation to risk assets), the answer is “yes”. That is, yes, he did influence it, if not directly by badgering Powell, then certainly indirectly by talking the market into the worst December since the Great Depression, which in turn tightened financial conditions and threatened to spill over into the real economy.

Meanwhile, speaking of all that “momentum” Trump says the US economy has, the 3M-10Y just inverted for the first time since 2007.


“Make yield curves inverted again!”

But hey, look at the bright side – if the economy careens into recession, Trump will finally get those rate cuts he’s been pushing for.


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2 thoughts on “Make Yield Curves Inverted Again! As 3M-10Y Goes Negative, Trump Assails Fed

  1. I’m not sure how to reconcile the calls for long risk against backdrop of economic weakness (especially out of EU) and earnings recession on the horizon. I understand a dovish Fed is good but the level of confidence among analysts is fairly surprising, imo.

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