It’s Urgent

“It’s essential that we move with urgency — inaction will produce a self-reinforcing downturn causing yet more devastation,” Janet Yellen proclaimed on Tuesday, after being introduced as Joe Biden’s Treasury Secretary-in-waiting.

“To the great public servants of the Treasury Department, I look forward to working with you to rebuild the public trust,” she added.

Yellen’s short speech served both as an explicit commitment to combatting the myriad inequities embedded in American society and as a tacit rebuke of the outgoing administration, which, pretensions to caring about the middle-class notwithstanding, rewrote the tax code in favor of the rich and corporations and purposefully stoked the worst social tensions since the 1960s.

Some will scoff at Yellen’s remarks given the role monetary policy played in exacerbating inequality over the past two decades. As ever, I’d remind voters that you elect lawmakers to serve the public interest. When they are derelict in their fiscal duties or otherwise decide to outsource the job of fostering economic growth and stability to an unelected body of technocrats operating with a limited tool box and informed by a soft science, you shouldn’t be surprised when things go awry or when the outcomes aren’t utilitarian in nature.

I’ve been over that countless times before, so I won’t rehash it here. The bottom line is that whatever you want to say about the Fed, inequality, and bubbles, Congress has the power to ameliorate the situation and they never do. Not through competent regulation, not through common sense tax policy, not through fiscal policy aimed at closing the wealth gap, and certainly not through the kind of overt monetary-fiscal partnerships that would lift the veil on the absurd charade that says QE isn’t government financing just because there’s a primary dealer in the middle of it. Doing away with that latter arrangement has the potential to direct trillions in digitally-conjured dollars to some useful purpose, like infrastructure, as opposed to condemning them to purgatory where they reside in perpetuity as stranded, inert bank reserves.

You can argue these points with me if you like. Long-time readers will attest that you won’t win. And that’s assuming you can goad me into engaging, which isn’t guaranteed.

Anyway, US equities started December on solid footing, rising with their global counterparts on the first day of the last month of the longest year of our lives. Both the S&P and Nasdaq hit new highs.

Stimulus chatter was in play, with both Nancy Pelosi and Mitch McConnell apparently floating revised proposals, although one assumes the two sides are still miles apart. McConnell’s deal sounds like the same relatively meager proposal he’s floated twice since August.

“Waiting until next year is not an answer,” he had the gall to say. “I’m focused on accomplishing as much as we can” before year-end. Spoiler alert: No, he’s really not. And that’s not necessarily a partisan assessment as much as it is a reality check. Mitch’s calling card is the opposite of “accomplishing as much as we can.” His reputation revolves around an uncanny knack for stonewalling progress.

Despite the long odds of a lame-duck stimulus deal, the long-end did selloff materially Tuesday, with yields cheaper by as much as 12bps out the curve.

“Tuesday’s price action offered further confirmation that November month-end and rebalancing was offsetting the underlying bear-steepening sentiment in the Treasury market,” BMO’s Ian Lyngen and Ben Jeffery said, adding that Tuesday’s backup in yields was “at high risk of the classic folly of ‘explanation chasing price action’ as the move lacked any obvious trigger save the price action itself.”

There is, of course, plenty to inform a bearish bond thesis, whether it’s the pro-cyclical rotation in equities or the vaccine optimism upon which that rotation is predicated or the prospect of Yellen throwing her considerable clout behind big spending in Washington.

But it’s not clear why any of that would have manifested in a selloff on Tuesday specifically. “Strong US manufacturing data and long-end paying flows in swaps contributed, on the first day after a large month-end index rebalancing,” Bloomberg’s Edward Bolingbroke noted. Obviously, the curve bear steepened.

The month started off on an upbeat note with solid PMIs for key Asian economies. Generally speaking, market participants seem keen to ride what most assume will be a year-end melt-up catalyzed by vaccine optimism and the promise of political stability in the US.

Of course, this comes with the caveat that both the US and Europe are staring at likely double-dip downturns following the latest COVID lockdowns. This is the never-ending push-pull between a better tomorrow and a rather disconcerting today. Tomorrow can’t come fast enough.

Or, as the incoming Treasury Secretary put it Tuesday, “it’s essential that we move with urgency.”