With the Democrat clean sweep confirmed, financial markets hitched themselves onto the last stimulus train out of town overnight, helped along by a contrite (by his standards) President Trump promising an orderly transition of power. Equity markets powered higher, oil gained, and the US dollar debasement conspiracy theorists pumped Bitcoin to a new high above USD40,000.00 per digital coin.
One corner of the markets that wasn’t experiencing the fill your boots, buy everything FOMO, be a millionaire by lunchtime with a few clicks of the mouse trade, was currency markets. The expected stimulus buffet catered by the Democrat closed early as US yields, cooking in the kitchen, looked at the balances in their Bitcoin accounts and promptly resigned faster than a Trump cabinet secretary.
With financial markets pricing in a Democrat-controlled government as the Caligula’s of debt issuance, the US yield curve has continued to squeeze higher and steepen. The US 10-year note, the risk-free bedrock of modern finance and the NPV/IRR happy place of CFO’s and “financial engineers” everywhere, moved higher to 1.08%. Meanwhile, the 30-year bond ground higher to yield 1.86%.
Combined with better than expected headline numbers from the ISM Services PMI and Initial Jobless Claims, the rising US yields put a floor under the US dollar, which rose overnight. Notably, the very rate-sensitive USD/JPY, which climbed 0.75% to 103.80 overnight, helped along by Japan’s unique interpretation of a Covid-19 state of emergency. The US dollar rose broadly, but notably against the global recovery trade darlings, the Australian and New Zealand dollars. The AUD/USD fell 0.45% to 0.7770, and the kiwi fell 0.67% to 0.7260.
The US dollar strength overnight is a mere flesh wound in the context of the secular dollar downtrend that is likely to persist throughout 2021. January’s FOMC meeting will be interesting now, as the market’s probe for the Fed’s yield pain point. If yields continue squeezing higher, the FOMC may need to send a clearer signal than they wished at the end of January on what they will tolerate and whether yield curve control is on the horizon.
Of course, the Democrats do not have the fiscal largesse that markets are anticipating. As outlined yesterday, the Byrd Rule means a Senate majority of 60 votes is required to raise government spending at the expense of income over a 10-year horizon. Not all Democrat Senators are Late Show with (insert hostname here), from New York. Where we sarcastically tell large parts of America that they are stupid from our ivory intelligentsia towers.
So, a blue wave of debt-fuelled fiscal, infrastructure and environmental stimulus is not a done deal. That fact won’t make an iota of difference to the equity and commodity markets, where rates would have to be a lot higher to derail the FOMO bandwagon. But if yields keep rising it may well make itself felt in currency and precious metals markets. That could lead to a temporary sundering of the buy everything trade until the FOMC on the 27th of January. January may, therefore, become the buy almost trade with the month notable for dollar strength.
Tonight’s Non-Farm Payrolls will round out the week. Several forecasters have lifted the expectations above consensus of 70,000 jobs added in the past few days, notably as Initial Jobless Claims seemed to stabilise around a mere 800,000 jobs lost a week. (bless the power of markets to be “forward-looking”) With stimulus-mania sweeping markets and making any data analysis almost worthless at the moment, a weak number will be quickly forgotten as it doesn’t fit the narrative. However, if the Non-Farm Payrolls were to print above 150,000, equities markets are likely to receive a nice turbo boost to the buy almost everything trade to finish the week.
