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Five Things

Impeachment vote, taper talk, and financial crisis warning. 

First second  

The House will begin to debate impeaching President Donald Trump for a second time shortly after 9 a.m. Eastern Time this morning, with a vote likely to conclude by 5 p.m. While Trump is almost certain to become the first U.S. president to be impeached twice, it is still not clear what happens with the Senate, with a conviction before President-Elect Joe Biden is inaugurated very unlikely. The president continues to show no remorse for last week's events, saying yesterday that his comments to his supporters were "totally appropriate." 


Some Federal Reserve officials have said that they see the possibility of a strong economic rebound, driven by more fiscal support and vaccination numbers, which would set the stage for a discussion on tapering bond purchases before year end. While others, such as St. Louis Fed President James Bullard, suggested a wait-and-see approach was more prudent, the specter of a repeat of the 2013 taper tantrum means investors are likely to stay vigilant as yields continue to move higher. There is less uncertainty in the euro area, with European Central Bank President Christine Lagarde saying this morning that continued monetary and fiscal support for the region's economy will be needed. 


Speaking of the bond market, today's inflation data is unlikely to do much to move the dial, with the headline number expected to have ticked higher to 1.3% in December. The core reading is likely to remain at 1.6%, with the data published at 8:30 a.m. World Bank Chief Economist Carmen Reinhart had a warning for anyone looking for a fast recovery, saying that the pandemic may overwhelm balance sheets, triggering a financial crisis. Governments around the world are bringing in even more restrictions to slow the spread of the virus. The U.S. saw fatalities from Covid-19 climb by a record 4,610 yesterday.  

Markets quiet 

There is little movement in global equities again this morning, while the outlook for the next round of U.S. stimulus will become clearer after the end of Trump's presidency. Overnight the MSCI Asia Pacific Index added 0.5% while Japan's Topix index closed 0.3% higher. In Europe the Stoxx 600 Index was little changed at 5:50 a.m. S&P 500 futures pointed to a slightly lower open, the 10-year Treasury yield was at 1.12%, oil rose and gold was flat.  

Coming up...

Investors looking for guidance on Fed policy have no fewer than five speakers today, and the publication of the Beige Book at 2:00 p.m. to look forward to. The EIA updates U.S. oil inventories numbers at 10:30 a.m. and the December budget statement is at 2:00 p.m. CES continues and IHS Markit Ltd. report earnings. 

What we've been reading

This is what's caught our eye over the last 24 hours.

And finally, here's what Joe's interested in this morning

At the time I'm typing this, the yield on the U.S. 10-year Treasury is above 1.12%, having been below 0.95% just at the beginning of last week. The strong move higher, coupled with some recent Fed chatter, has some people wondering if we're about to get a true "tantrum" in the market, and a spike towards much higher yields that creates rippling volatility throughout multiple asset classes.

Here are two things to think about.

First, the recent move up in yields can be very directly tied to the Georgia election results last Tuesday. The twin victories by the Democrats mean we are likely to see more stimulus in the short term -- bigger direct checks, aid to struggling states, backfilled unemployment -- and potentially more long-term spending to permanently put more buying power in the hands of people with lower incomes.

In light of all this, you could argue that the real story is that rates aren't higher. Here we have a potential for major fiscal expansion, risky assets at all-time highs, expectations for extremely rapid growth in 2021 (knock on wood), and yet we're still below February yields. This in fact is the goal of the Fed's current policy regime as laid out at Jackson Hole last summer, to indicate a much more cautious approach to hiking rates than it had previously.

Second, there's a good reason to think we won't have a true Taper Tantrum this time around, like we did in 2013. Coming out of the Great Financial Crisis, the Fed was still developing its toolkit, and working on its communication skills. Large Scale Asset Purchases (so-called QE) were conducted, in part, as a means of signaling to the market that rates would be kept very low for a long time. So when the Fed started talking about paring back on those purchases, it was seen as an explicit indication that rate hikes would be coming into view.

This time around, the asset purchases don't serve that purpose. They were undertaken to smooth the functioning of financial markets back in March, and not as a rate signal. The Fed knows how to message on rates now, as pointed out above. The market believes already that they won't be hiking rates at the first whiff of 2% inflation. In fact if anything, maybe the market is overly skeptical of the Fed's willingness to raise rates in the next few years. Thus even in the absence of asset purchases, there's no obvious reason for investors to sell Treasuries if the economy is still operating below capacity and inflation is mild.

Joe Weisenthal is an editor at Bloomberg.

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