Never a dull moment.
Markets were subjected to more unnecessary drama on Friday, as investors, analysts, and traders tried to sort out the implications and, more importantly, the rationale, behind Steve Mnuchin’s decision to compel the Fed to end several of the emergency liquidity facilities that lent support to key markets over the course of the pandemic.
Mnuchin and Republicans are hewing to talking points about repurposing the funds. Treasury’s decision is “fully aligned with the letter of the law and the intent of Congress,” Mitch McConnell, who met with Mnuchin on Friday, said. He insisted there’s “an obvious right use” for what the administration is pitching as unused money just looking to be allocated. (That’s not an entirely accurate characterization.)
Democrats and the Fed, other the other hand, aren’t enamored with the idea. Simply put: The Fed isn’t keen to be hamstrung at a time when the economy may be headed back into recession amid coronavirus lockdown protocols, and critics are concerned that Trump may be angling to kneecap markets and the economy in the weeks ahead of Joe Biden’s inauguration.
On Friday afternoon, Fox’s Charlie Gasparino said the Trump administration wants a $150 billion tranche of PPP by the end of next month, a move the outgoing president hopes will help ensure Republicans win Georgia’s crucial runoffs set for early January.
Speaking to CNBC Friday, Mnuchin said he intends to talk to Nancy Pelosi and Chuck Schumer soon. “We are going to come up with a plan to sit down with Pelosi and Schumer and try to get a targeted bill done for the people that really need it, and hopefully the Democrats will work with us, and hopefully that will get done,” he said.
So, Mnuchin is planning to plan a plan. Sounds encouraging, no?
Meanwhile, JPMorgan now expects the US economy to shrink in Q1. The thesis isn’t complicated. “While the economy powered through the July [coronavirus] wave, at that time the reopening… provided a powerful tailwind,” Michael Feroli said. “The economy no longer has that tailwind,” he added. “Instead it now faces the headwind of increasing restrictions on activity.”
You won’t be surprised to learn that Larry Kudlow doesn’t agree. “The economy has tremendous momentum,” he claimed.
Overall, US equities were mixed for the week. Vaccine optimism is running high, but lockdowns and the extremely disconcerting realization that the Trump administration doesn’t plan to work with the President- and Vice President-elect to coordinate a response has left investors to weigh a brighter 2021 against dark days during the holiday season.
Mnuchin’s demands of the Fed only underscore fears that Trump is taking a scorched-earth approach on his way out the door, with the possible exception of some manner of targeted virus relief in December to help with the Georgia runoffs.
As discussed here on Thursday evening and on multiple occasions Friday, this means the Fed will probably move ahead with WAM extension at the December meeting. Some are suggesting Powell could even ramp up the pace of monthly asset purchases, although that isn’t the consensus — yet.
“At the margin, I expect Mnuchin’s move to send gold higher and the US dollar lower. The Fed will have no choice but to create more US dollars,” Kevin Muir, formerly head of equity derivatives at RBC said Friday. “Anything more complicated than that is over thinking this latest move,” he added, noting that he’s “been buying gold” since Mnuchin’s letter was made public. “I was already long, but this only steels my resolve,” Kevin remarked. “I’d sell more US dollars, but I’m already short enough.”
The yellow metal has struggled of late. Despite posting a gain on Friday, gold was down for a second straight week and is under enormous pressure from what looks like a big liquidation in ETF holdings. “Flows into the ETFs propped up the price even as positioning in the futures market turned more bearish,” Bloomberg’s Eddie van der Walt noted. “These two venues are the most powerful forces in price discovery [and] when both trend in the same direction, they’re an unstoppable force.”
Activity in rates was muted Friday, with futures volumes running a mere 70% of the 20-day average. Questions are beginning to swirl around the consensus steepener narrative given the likely hit to growth from virus lockdowns and the Fed on the verge of extending the maturity profile of monthly purchases.
Ultimately, most market participants seem to think that between vaccines and the Fed, there’s little utility in not buying any material weakness. But there are still plenty of land mines between now and the end of January, when (forgive me) sanity will return to 1600 Penn.
Commenting Friday on Trump’s brazen efforts to overrule voters in Michigan, one of the president’s campaign advisers delivered a straightforward assessment. “It’s just a sh*tshow,” the person told Jonathan Swan. “It’s a joke.”
That applies to virtually everything going on inside the Beltway right now.