The Market Today
Government Re-Opens But Delays Inevitable Battle Royale
by Craig Dismuke, Dudley Carter
Today’s Calendar – Quiet Day for Data; World Economic Forum Begins: It’s another quiet morning for the economic news with only the Richmond Fed Manufacturing Index scheduled for 9:00 a.m. CT. Federal Reserve nominee Marvin Goodfriend will appear before the Senate Banking Committee today for the first step in his confirmation process. The World Economic Forum kicks off in Davos today which will likely be filled with subtle criticism from world leaders on the U.S. position of seeking more pro-U.S. trade arrangements. President Trump is scheduled to speak on Friday. According to the WSJ, there is “dramatic tension hanging over the World Economic Forum this week … around whether the unabashed American nationalist is coming to bury Davos or to praise it.”
The Escalating Risks of a Debt Ceiling Dilemma: After Congress passed another continuing resolution yesterday to fund the government through February 8, the focus will increasingly become the rapidly approaching debt ceiling. This weekend’s partial government shutdown was just a minor blip for the markets with very little response. However, the stakes will be much higher if Congress is also negotiating a debt ceiling increase. Considering the still-great divide between parties on immigration and border security (and other complex spending issues), it seems unlikely that today’s legislative hurdles are cleared by February 8. As such, the odds of another CR are high which could push the government funding debate into a debt ceiling/government funding/immigration/border security debate. This raises the likelihood of the Senate having to invoke the “nuclear option” as Democrats did with blocked court appointments back in 2013 and Republicans did with then-Supreme Court nominee Gorsuch in 2017.
Overnight Activity – Equities Gained, Treasury Yields Flattened as Deadlock in Washington Broke: Asian equities posted impressive gains overnight (most exchanges were up more than 1%) and initially gave European markets a boost. European exchanges followed that trend for several hours before swiftly flipping back to unchanged on the day. The sharp reversal occurred alongside a similar downturn in U.S. futures which remain mixed but little changed. The fluctuations in equities had little to no impact on Treasury yields which have moved steadily lower since the start of the Asian session. After a tough week last week, oil prices rose for a second day back towards their two-and-a-half year highs from last week. With the U.S. federal government set to re-open this morning – the President signed the latest temporary spending bill last night just before 8 p.m. CT – markets shifted their immediate focus away from Washington, at least for now. In its latest decision, the BoJ left its policy unchanged and Governor Kuroda attempted to dispel speculation the central bank was looking for a quick way out of accommodation. Kuroda said, “Given there is still a distance to the achievement of the 2 percent price stability target, I don’t think that we are at a stage where we consider the timing for a so-called exit, …The Bank of Japan thinks it’s necessary to continue tenaciously with the current powerful easing for the sake of the economy.” The Yen initially weakened but has since recovered. Just in front of the open of U.S. trading, the 2-year Treasury yield was down 0.4 bps to 2.06%, the 5-year yield was down 1.9 bps at 2.43%, and the 10-year yield was 2.8 bps lower at 2.62%.
Yesterday’s Trading Activity – Underlying Trends Hold Before and After Senate Agrees to End Shutdown: It was an interesting day for the markets as investors and traders digested the Senate’s deal to re-open the government and push a fight over spending and immigration out for another three weeks (through February 8). The deal remained in limbo as U.S. markets opened on Monday. Despite mixed futures trading in the pre-market period, equities turned positive within the first thirty minutes of trading despite the ongoing political uncertainty. Treasurys, however, opened more cautiously with the curve flattening on an anchored short-end and a modest drop for longer-maturity yields. The Dollar was slightly weaker against most other major currencies. As news began to filter out that moderates in the Senate had secured enough support for another temporary spending plan, markets responded. In another example of the resiliency of the ongoing bull run, equities, which had strengthened with the government closed, strengthened further on news it would re-open. Treasury yields began a rebound that would ultimately leave the curve little changed for the day; the 2-year yield slipped 0.4 bps while the 10-year dropped a slightly larger 0.9 bps. The Dollar jumped but then pulled back to close at its low-point of the day. Despite all of Monday’s noise, the recent trends across asset classes remained the constant: equities notched another round of all-time high closes, Treasury yields remain at or near multi-year highs, and the Dollar is at its weakest level in three years.