THE BOND MASSACRE
The Trump bond massacre since election night:
- US 30Y yield: from 2.5% to 3.0%
- US 5Y: 1.2% to 1.7%
- CDA 10Y: 1.0% to 1.55%
- Mexico 10Y: 5.8% to 7.4%
- Brazil 10Y: from 11.1% to 12.3%
- UK 30Y: 1.8% to 2.1%
- Poland 10Y: 2.6% to 3.5%
Etc. including Europe and Asia. (The Daily Shot)
(…) What is different this time is the possibility of the Trump administration’s protectionist policies. These worries are real, but global trade has already stagnated for several years, a situation to which emerging economies have grown accustomed. Demand in emerging markets is increasingly domestic and reliant on trade with other emerging markets. Any improvement in U.S. growth will be a tailwind. (…)
A wild card is China. Its currency has weakened 12% since the end of 2014, and hit its weakest level since 2008 Tuesday. Other emerging markets will guide currencies lower where they can, to stay competitive. (…)
EM currencies are experiencing one of the fastest corrections in years. Here is the JPMorgan Emerging Markets Currency Index. (The Daily Shot)
- EM equities have been selling off broadly. Are these declines overdone? Below is the Philippine stock market index.
- Even India’s market took a hit on Monday.
- And this, equivalent to a 25bps Fed tightening:
Yuan Slides to Lowest Level in Nearly Eight Years The People’s Bank of China has allowed the yuan to weaken for the last eight consecutive trading days, with the pace picking up since the dollar’s global surge following Donald Trump’s election victory.
The yuan devaluation exceeds 10% since August 2015. Which way for China now?
Despite global growth lifting higher at the start of Q4, the October Markit Global Business Outlook survey, which looks at expectations for the year ahead across 12,000 PMI-survey companies, recorded the joint-weakest level of optimism since data collection started seven years ago. The mood was darkened by reduced optimism among US and UK companies, mainly reflecting worries about how the US election and Brexit may affect business conditions in the coming year. However, optimism improved in Japan, Eurozone, China, Russia, India and Brazil.
Global investment and employment intentions remain close to survey lows. Global profits were also under pressure as firms generally reported an inability to pass expected higher costs on to customers.
Hmmm…maybe not just yet:
Loan Originator Perspective
Bonds continued their epic selloff today, as rates rose again. In 4 business days we’ve now lost close to 160 bps, a staggering amount, which translates to a rate increase of .75% or more on most loans. Since 2000, I’ve seen this epic scale of “face-melters” twice, in 2004 and the “taper tantrum” of 2013. We’re past the point of hoping to regain last week’s pricing, it’s not going to happen, time to look forward, instead of back. LOCK…..LOCK, and, oh yes, LOCK. –Ted Rood, Senior Originator
Way too much selling, way too fast. Bond markets have priced in a future that includes 2-3 years of a Trump administration successfully transitioning our entire economy. This is way oversold, I am patiently waiting for the markets to come back to reality. It may take some time, but it’s inevitable. I’m floating for now, but closet monitoring the markets. –Gus Floropoulos, VP, The Federal Savings Bank
While manufacturing PMIs have stabilized and showed some growth in the EMU, the industrial production index is lower in September and has fallen in two of the last three months. IP is up on balance over 12 months, but the last 12 monthly changes in manufacturing IP are split evenly between showing gains and declines month-to-month. (…)
On balance, the EMU sees a great deal of variability in recent momentum as well as in ongoing performance among members. While Germany has strong ongoing performance, there is nothing in its recent momentum that stands out. The Netherlands, Portugal, Finland and Italy each has stronger 12-month gains in output than Germany and Germany is one of only four countries in the table with output declining over three months on balance. As the usual strong economy of Europe, Germany is not pointing to any breakout although growth is still in gear. Europe appears to continue to muddle ahead without a clear sector or country leading it.
A badly designed US stimulus will only hurt the working class Not even US presidents with political mandates can repeal the laws of economics (Lawrence Summers)
(…) the [infrastructure] plan presented by his advisers, Peter Navarro and Wilbur Ross, suggests an approach based on tax credits for equity investment and total private sector participation that will not cover the most important projects, not reach many of the most important investors, and involve substantial mis-targeting of public resources.
Many of the highest return infrastructure investments — such as improving roads, repairing 60,000 structurally deficient bridges, upgrading schools or modernising the air traffic control system — do not generate a commercial return and so are excluded from his plan. Nor can the non-taxable pension funds, endowments and sovereign wealth funds that are the most promising sources of capital for infrastructure take advantage of the program.
(…) the Trump tax reform proposals are too expensive. Many, like the proposed abolition of the estate tax, will only benefit the high-saving wealthy. (…)
The Mexican peso has depreciated about 10 per cent relative to the dollar over fears of new protectionist policies, and many other emerging market currencies have also fallen sharply. The impact of this change is to raise the cost of anything the US exports to Mexico and to lower the cost of anything Mexico exports to the US.
It will also make Mexico and other emerging markets much cheaper relative to the US for global companies. So US workers, particularly in manufacturing, will see increased pressure. (…)