Politics strain markets

Fed's Fischer warns of limits to expanding the US fiscal deficit without 'consequences'. EU political stresses move into focus

Bonds

Fed's Fischer warns of limits to expanding the US fiscal deficit without 'consequences'. EU political stresses move into focus

22nd Nov 16, 7:59am by Jason Wong

By Jason Wong

In a (US) holiday-shortened week, bond markets have been fairly quiet, with nothing of note on the economic release calendar to react to. All eyes remain on Trump as he decides on some key appointments that will lead his administration.

Germany's 10-year rate rose by 1 bp to 0.28%. The key near-term risk events for European bonds are Italy's forthcoming referendum on constitutional reform on 4 December, Austria's elections the same day, and the ECB meeting soon after, where investors are sensitive to any comment about the possible “tapering” of asset purchases.

Ahead of these risk events, Germany's bond market is likely to trade cautiously and in tight ranges, while pressure remains on peripheral countries like Italy. The polls are close but currently signal a vote for no change, which would see the fall of Italy's government and more possible turmoil for the region.

In US Treasuries, selling pressure at the long end of the curve has taken a breather, which sees a mild flattening of the yield curve. While the 2-year rate is unchanged at 1.07%, the 10-year rate is down 3 bps to 2.33%.

US Fed vice-chair Fischer said that the economy had moved “back in the vicinity” of the Fed's employment and inflation targets, giving a nod to a December rate hike, which is now close to fully priced. He encouraged fiscal policies which increased the productivity of the economy and boosted long-term growth. He wasn't perturbed by the surge in 10-year bond yields, calling it “not that unusual” but warned that there wasn't a lot of room to increase the fiscal deficit “without adverse consequences down the road”.

Yesterday, the local rates market took a breather as well, after the pummelling dealt to on Friday. The mid to long end of the swap curve showed rates down in the order of 1 bp, while the 2-year rate was unchanged at 2.26%. There is little local data this week to drive the rates market, so global forces will dominate. Migration data is released today, which doesn't usually move the market, while the RBNZ's Bascand gives a speech entitled “Changing Dynamics in Household Behaviour”, again unlikely to interest traders. Overnight the release calendar is fairly light as well.

Daily swap rates

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Source: NZFMA

Jason Wong is on the BNZ Research team. All its research is available here.

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3 Comments

by Zachary Smith | 22nd Nov 16, 8:44am 1479757485

Deutsche Bank appear to be positive about a Trump administration:

Deutsche Bank: Trump Could Push the U.S. Economy and Stock Markets to New Records

Also

BET founder, after meeting with Trump, says black Americans should give president-elect a shot

During the campaign, Trump made the case to African-American voters that Democrats let them down, and argued repeatedly "what do you have to lose" by voting for him.

Johnson, who had supported Democratic nominee Hillary Clinton, said he told Trump over the weekend, "The real question you should be asking is what do African-Americans have to gain from your presidency."

And

Ford has now committed to continue building the Lincoln MKC small sport utility vehicle at a Kentucky factory

If a company currently manufacturing small cars in the US moves its production to Mexico where wages are 80% less it seems entirely reasonable that tarifs of 35% are imposed on those products if resold back to the US market.
This can only give American businesses confidence in the new administrations new direction.
Countries with low labour costs should look to build their own products. Many components like engines can be imported.

by murray86 | 22nd Nov 16, 9:00am 1479758426

You're starting to get it Zac, or at least explicitly comment on it. I do think you're being a little idealistic on the American motor companies. they set up in places like mexico not to support the local economy (an intention of NAFTA) but to cut costs and improve profit margins. A tariff would cancel that out, making it worthwhile to retain production in the US. A result will likely be reduced profits, but profits none the less, that will go against the economic theories propounded by accountants and economists where the shareholder was paramount. What the world is learning is that this model is largely parasitic (I do have a share portfolio, so do understand what i am saying) where the symbiotic relationships between companies and the societies where they operate is ignored, and usually abused. The importance of paying tax into those societies, creating jobs that pay decent wages, protecting work forces and so on are aspects of business that most large organisations have minimised and trivialised forcing Governments to legislate in many of these areas.

I don't believe Trump will, however do anything to change this state of affairs. After all he is a billionaire business man, and the changes required will ultimately impact on his ability to do business too. Still we can hope.

by Stephen Hulme | 22nd Nov 16, 1:18pm 1479773937

He wasn't perturbed by the surge in 10-year bond yields, calling it “not that unusual” but warned that there wasn't a lot of room to increase the fiscal deficit “without adverse consequences down the road”.

I guess a 1.62067% one year LIBOR quote doesn't perturb his train of thought either.

Nonetheless:

If money market reform is totally responsible for the rise in money market rates including LIBOR since June, it is only because there are clear systemic, liquidity issues that remain even nine years after they first appeared. At best, this indicates that 2a7 “reform” is a change which the sapped eurodollar system cannot seem to manage, thus indicating gross systemic deficiency. And if this is almost totally unrelated to 2a7, it still amounts to the same thing; systemic deficiency which cannot handle the dramatic events of the past more than two years…It is the fitting paradox to modern central banking; a world since flooded with bank reserves is still desperately short of money and getting more so. Read more