Daily Comment (March 27, 2019)
by Bill O’Grady and Thomas Wash
[Posted: 9:30 AM EDT] Equities are modestly lower in a quiet news environment. The big story remains in the long end of the yield curve as the 10-year T-note yield falls below 2.40%. Here is what we are watching this morning:
Why are bonds rallying? We suspect there are two factors sending yields lower. First, expectations toward monetary policy have flipped. The market expects the next move by the FOMC will be to lower rates. Stephen Moore, the president’s most recent nominee for Fed governor, is calling for an immediate rate cut of 50 bps. Although none of his future colleagues are supporting him (so far), assuming he is confirmed, he will be a consistent voice in favor of rate cuts. It should be noted there is an international element to this trend. ECB President Draghi indicated today that his bank is prepared to support the Eurozone economy by delaying policy tightening. Second, there are growing fears that the economy is not only slowing but may be stumbling. With inflation low and economic data weak, there is an incentive for safety assets. To some extent, the rally in bonds is starting to look like a momentum trade, which probably means it’s getting overdone. Reversing the rally will require improved economic data.
Brexit: The “indicative voting” process begins today and will likely continue into tomorrow. Sixteen different proposals are being considered. None are binding on the government; however, if any get overwhelming support (which isn’t likely) then PM May would be forced to either support the proposal or resign. Champions of Brexit are coming to the realization that May’s plan may be the best they can get, so there has been some talk of simply accepting the May plan. Overall, we doubt anything definitive comes out of this process; if we are correct, the odds of a long delay are increasing.
Bouteflika out? The current president of Algeria appears to be losing support of the military. The army chief of staff, Gen. Ahmed Salah, is now openly calling for the president to be removed. Bouteflika has suffered a series of strokes and is, by most accounts, incapacitated. So, if the military has decided that he is finished then it probably means the end is near. A peaceful transfer of power in Algeria is important; the country is a member of OPEC and a significant supplier of natural gas to Europe.
An update: Earlier this month, we reported that a shadowy dissident group had broken into North Korea’s embassy in Madrid as President Trump and Chairman Kim Jong-un were meeting in Hanoi. Apparently, the leader of the “operation,” a Mexican national living in the U.S., Adrian Hong Chang, fled to Portugal after the raid and flew back to the U.S. An American, Sam Ruy, was also involved. Spanish officials have issued international arrest warrants for both men. According to reports, the group has offered materials seized in the raid to the FBI. U.S. security officials have declined to comment.
Turkey and the lira shorts: In the run-up to elections, Turkey has sent overnight interest rates to nosebleed levels, around 300%, to punish currency shorts. To short a currency, a trader essentially borrows in the currency he is shorting. The high interest rates are making shorting really expensive, reducing the attractiveness of such activity. Obviously, it will be impossible to continue such high interest rates indefinitely. At some point, those overnight rates will begin to affect other areas of the Turkish yield curve. But, in the short run, the move will stabilize the lira, which has been under pressure recently.
The return of the exurbs:The WSJ reports that housing development away from urban centers has been showing signs of life, adding to evidence that the housing market is continuing to recover. The article suggests that even younger buyers, who up until now have opted for urban rental property, are following the path of their parents and grandparents and moving out of the cities for cheaper housing after starting families.