Fairy Godmother

“Yellen will be in close contact with the Powell Fed to ensure that nearly all of the funding — or even more than all in real terms — for the spending is printed in the computers at the Eccles Building, or on whatever cloud server is hosting the Fed’s accounts,” Saxo’s John Hardy wrote, in a Tuesday note.

That amusingly colloquial assessment encapsulates the consensus view on Yellen’s return to government service as Joe Biden’s Treasury Secretary. Republicans, Hardy went on to remark, might find “it tough to say no when heavy spending levels in various proposed bills would also spur the economy in their districts.”

As far as explaining euphoric gains for US equities, it was difficult to disentangle Yellen optimism from relief that the GSA is finally allowing for a formal transition. It’s safe to say both were in play, as was short-covering. The Russell 2000 is up more than 20% in November. Small-caps are on track to outpace the Nasdaq 100 by the widest monthly margin in nearly two decades.

“Goldman’s equal-weighted basket of 50 companies with the highest short-interest in the Russell 3000 has outpaced the broader benchmark,” Bloomberg’s Ye Xie remarked. That’s obviously added fuel to the fire when it comes to sustaining the rotation from secular growth to cyclical value and small-caps.

There are any number of ways to visualize the situation. The simple figure (below) just shows the SX5E blowing the doors off this month despite lockdowns across Europe, easily besting US equities.

In still more evidence of the pro-cyclical bent, oil surged more than 4%, with WTI hitting $45 for the first time since March 6.

Gains in crude were at least partially attributed to Yellen/Biden optimism. But there’s more. “A rebound in Chinese domestic flights is aiding demand for jet fuel, the hardest-hit oil product,” Bloomberg wrote. “That broad recovery has helped drive the market’s return to… backwardation.”

Vaccine optimism is playing a role too, something Trump meekly noted during a forlorn, 60-second press conference on Tuesday “congratulating” Americans on Dow 30,000, a milestone he clumsily called “sacred.” One almost felt sorry for him — almost.

Pennsylvania certified its results for Biden, making Trump’s ongoing legal efforts to overturn the election feel even more akin to the famous Black Knight scene from “Monty Python and the Holy Grail.”

Treasurys sold off, but perhaps not as much as you’d expect given the character of the rally in stocks. Yields were cheaper by as much as 5bps out the curve, which bear steepened.

Speaking during a Wall Street Journal event, John Williams said Fed QE is “serving [its] purposes really well right now” and the FOMC “can think about any adjustments we want to make on those purchases.”

But he emphasized that fiscal policy is the better option when it comes to providing additional stimulus. “I think fiscal policy is really the most powerful tool right now,” Williams said. “That’s the thing that would be most effective in getting us through the next six months.”

And that’s where Yellen comes in. Early Tuesday, I reiterated my sentiments from Monday around the notion that there is no chance of Yellen allowing the US to fall back into the trap from the post-GFC experience wherein a weak-willed fiscal response put too much of the onus on monetary policy when it came to sustaining the recovery. Saxo’s Hardy drove home the point. The fiscal impetus seen during the Obama years “was peanuts relative to what the COVID-19 response has already brought,” he said, adding that Biden’s term “will be no repeat of the Obama years” in that regard.

“If the political establishment was in any need of evidence regarding investors’ opinion on the potential appointment of Yellen as the Treasury Secretary, just ask stocks,” BMO’s Ian Lyngen said Tuesday afternoon. “There was a notable nuance in today’s price action that served to marginally offset some of the recent bull flattening using a reverse of the same operative logic,” he went on to write. “If the 2s10s spread was narrower on the Mnuchin versus Powell showdown and what it implied for fiscal support, the Janet and Jay duo earns the credit for the bear steepening.”

And there you go. That’s your story.