“People are going to be evicted. But I’m going to stop it”, Donald Trump declared, while speaking to reporters at the White House on Monday. “I’ll do it myself if I have to”.
It would be overtly comical were it not for the dire circumstances. There was no readily ascertainable mechanism Trump could avail himself of on the way to extending virus relief measures with a single stroke of his famous Sharpie.
One imagines White House counsel was busy drawing up contingency plans, but there was no clear avenue down which Trump could travel on the way to saving millions of jobless Americans from going broke or keeping people in their homes and apartments without congressional consent. The US government simply isn’t functioning.
Unsurprisingly, US equities didn’t seem perturbed in the slightest, having become mostly immune to Beltway bickering years ago, and emboldened by the promise (both implicit and explicit) that if things get too bad, the Fed and Treasury will step in to ensure markets and the economy don’t completely implode.
The S&P hit the highest since February 21, about a week before Guggenheim’s Scott Minerd warned Joe Weisenthal the apocalypse might be upon us.
That was a few trillion ago (bottom pane).
Markets are essentially taking the view that the system (broadly construed) will survive the current crisis, even if irreparable damage has been done to America’s already tarnished international reputation.
It’s ironic that although Trump doesn’t really have any good options when it comes to mandating the extension of emergency measures passed by Congress, the Fed has acted unilaterally on a number of fronts, at least on some interpretations. Obviously, the official story is that Steve Mnuchin gives the green light and that most of the Fed’s emergency facilities are only possible because of the first-loss buffer provided by Treasury (figure below) which is itself the product of legislation.
But when it comes to people who have employed some derivation of the phrase “I’ll do it myself if I have to” over the course of the crisis, Jerome Powell stands largely alone in having made good on that promise. You may not agree with the results (“administered” markets, the further erosion of price discovery, moral hazard run amok, etc.), but one thing you can’t accuse central banks of being is shy.
Treasurys cheapened at the long-end Monday, and the curve generally held onto a steepening bias as stocks rallied. Some might be inclined to attribute the modest rise in yields to the Fitch warning, but that’s probably dubious. There were some high-grade deals that likely weighed, including a six-part offering from Alphabet.
“[We’ll] argue the ongoing outperformance of risk assets provided the initial impulse for profit-taking in Treasurys as the 50 bp level proved elusive for the time being”, BMO’s Ian Lyngen said, in an afternoon note, before striking a somewhat cautionary tone in suggesting that “the stronger-than-expected ISM manufacturing print has added to the positive risk sentiment and in doing so puts the market in a particularly vulnerable position in the event of a weaker-than-expected BLS update on the labor market”.
In the absence of good news out of Washington, the risks are skewed to the downside later this week — not necessarily in terms of the data itself (although likely there too), but rather in terms of the market reaction. While benign jobless claims and/or an in-line July payrolls print would both engender a (big) sigh of relief, it’s hard to see how that would translate into a meaningful risk-on move unless accompanied by an agreement on the next stimulus bill and/or positive news on the vaccine front. Sure, sharply lower jobless claims or a big beat on payrolls could spark a risk rally and push yields back higher, but those outcomes seem far-fetched.
Treasurys (and bunds) are looking at a bullish seasonal in August, and yet that doesn’t necessarily have to mean a continuation of the Ambien-esque drift and generalized ambivalence in rates (figure below).
“There has been a break in the recent prevailing stasis in the Treasurys market, which may usher the next wave of volatility across global asset classes”, Bloomberg’s Ven Ram wrote Monday, referencing last week’s move to the lower-end of the range in 10-year US yields (more here).
He continued: “With Fitch downgrading the US outlook, Trump raising the idea of delaying the election, and the economy having shrunk at a record pace in the second quarter, it would be hard to argue that the shift lower in yields has found a full-stop”.
Treasury said Monday it expects to borrow $947 billion in the July – September quarter, $270 billion more than announced in May. This is, of course, down to more spending and “anticipated new legislation”. The quarterly refunding announcement is due Wednesday.
Meanwhile, the dollar tried to regain its footing in the new week, extending Friday’s rebound off the worst month in a decade.
While political dysfunction bodes poorly for the dollar, as does the country’s inability to corral the virus, the greenback stands alone when it comes to unequivocally meeting all the requirements of a reserve currency. Most obviously, there is no alternative to US Treasurys in terms of a market deep enough and liquid enough for reserve managers and countries looking to recycle vast savings.
So, dollar downside is likely to stem not so much from real concerns about the durability of global USD hegemony, but rather from more “boring” dynamics like a continual grind lower in real yields stateside.
Coming full circle to the extension of federal unemployment supplements and eviction moratoriums, you’d certainly think failure wouldn’t be an option. And that could be part of what stocks are pricing in.