While Rome Burned

Under heavy political fire, postmaster general (and Trump donor) Louis DeJoy promised on Tuesday to keep delivering mail, a pledge meant to pacify an anxious public ahead of an election during which many voters plan to utilize mail-in ballots in order to ensure they don’t catch deadly viral pneumonia while trying to vote in person.

“The Postal Service is ready today to handle whatever volume of election mail it receives this fall”, DeJoy said, in a long overdue statement. “We will deliver the nation’s election mail on time and within our well-established service standards”, he added. “The American public should know that this is our number one priority between now and election day”.

DeJoy went on to say that his controversial “reform” measures, as well as other initiatives which predate his arrival at the postal service, will be suspended until the election is complete. Further, retail hours at post offices will not change, mail processing equipment and blue collection boxes will remain where they are, no mail processing facilities will be closed, and overtime has, and will continue to be, approved as needed.

That won’t satisfy critics, but it’s a step in the right direction.

Although DeJoy put himself in this position, he’s the latest in a long line of Trump officials who are “guilty” by association. The president is correct to suggest that Democrats take a “guilty until proven innocent” approach when it comes to his associates. That approach is informed in part by the fact that a handful of his associates were, quite literally, found guilty after being presumed innocent.

One of those associates is Paul Manafort whose presence on Trump’s 2016 campaign “created opportunities for Russian intelligence services to exert influence over, and acquire confidential information”, according to the final report on Russia’s role in the last election, released on Tuesday by the GOP-controlled Senate Intelligence Committee. “Vladimir Putin ordered the Russian effort to hack computer networks and accounts affiliated with the Democratic Party and leak information damaging to Hillary Clinton and her campaign for president”, the report reads, adding that “Manafort’s high-level access and willingness to share information with individuals closely affiliated with the Russian intelligence services… represented a grave counterintelligence threat”.

That’s just a taste of Tuesday’s political news, which, when taken as a whole, can be aptly described using any synonym for the word “nauseating”.

US equities took it in stride (how many times have you heard that?). The S&P of course touched an intraday record high, and fund managers have finally thrown in the towel on the “bear market rally” characterization. That probably means the top is in. I jest — or not.

Tech outperformed, in keeping with precisely the kind of deliberate bull flattener described in “‘Two Weeks Of Calm’ And What’s Next For Stocks, Bonds, And Gold“.

“We’ll be the first to concede the Treasury market remains in a seasonally bullish period, leaving the flattening bid consistent with history if nothing else”, BMO’s Ian Lyngen, Benjamin Jeffery, and Jon Hill said, in an afternoon note. “This dynamic also, at least marginally, can excuse the muted bearish pressure from the new milestone for domestic equities, although, it’s been a while since the risk-on/risk-off narrative was a key driver in US rates”, they added.

In equities, note that the vol. control universe likely continues to add exposure, with 1-month realized inside 3-month, which is itself back to levels last seen in March.

Nomura estimates the vol.-control crowd has added $84.2 billion over the past three months, $23.4 billion over the past one month, and $6 billion over the past two days.

The big story is still the dollar, which remains squarely on the back foot. In fact, the greenback hit the lowest since May of 2018 Tuesday in a fifth day of declines.

While the steady drumbeat of positive news from the housing market (e.g., housing starts) suggests there are indeed bright spots in the world’s largest economy, uncertainty is still rampant, especially with the election looming.

That uncertainty is being reflected in the dollar’s inexorable slide. US real rates began falling again early this week after rising during last week’s fleeting bond selloff. Tuesday marked a second straight daily drop.

The more deeply negative real rates go, the more pressure.

The latest edition of BofA’s Global Fund Manager survey shows “dollar debasement” making the list of top tail risks.

Also on that list: the US election and the trade war. The latter was once a source of strength for the greenback, but policy divergence between the Fed and the PBoC, combined with expectations for a more robust Chinese recovery, have seemingly undermined that bullish pillar for the dollar as well.

While the prospect of more fiscal stimulus and an even larger deficit might be construed as dollar negative, it’s now abundantly clear that gridlock in D.C. is weighing on the currency. It’s true that additional borrowing may compel the Fed to accommodate issuance with more QE, but to the extent any failure to cement a new stimulus deal undermines the recovery, it will mean the Fed is forced to lean even harder into easing, perhaps adopting more aggressively dovish forward guidance, and buying more bonds anyway.

Speaking of stimulus, Steve Mnuchin hopes the House’s forced return (to rescue the post office) might help unfreeze the stalled talks. “Since Speaker Pelosi is coming back to look at Postal, hopefully she will be more interested in sitting down”, he said Tuesday.

As for whether Louis DeJoy’s efforts to shore up confidence will deter the House from voting Saturday on a bill that will ban cutbacks at the postal service and allocate $25 billion in funding, the answer is no. DeJoy’s statement, Pelosi said, is an “insufficient first step”.