Changes are coming and one of the hardest things to do is accept the changes that a new paradigm brings.

Those changes being, North Korea is no longer our worst enemy – that country is our best friend. However, the media is our worst enemy. This change seems somewhat Orwellian but what do I know? It is a change.

We have changes being brought to us by the major central banks. Rate rises are coming, and probably quickly. This is a change that we have to willingly embrace whether we like the change or not. The era of free money where every bet wins is coming to an abrupt end.

That bet is that rates are rising and rising fast. The Fed rose rates as expected today and the wind back of QE will accelerate as the year progresses. For equity valuations, the models will need a constant update.

The ECB is expected to provide guidance on Thursday and markets are expecting an announcement announcing an end to easy money. The BOJ goes Friday, so it’s a big week for interest rate announcements. The net result is that rates are rising. Let me say that again – rates are rising.

This is all coming together in what could be the perfect economic storm for the U.S. With tax revenues weak for the last half of 2017 as Treasury reported and with a tax cut, it’s hard to see how the growth in the U.S economy can mitigate the shortfall in revenues.

The Budget deficit widened 23% over the period between October through to May. The U.S. needs economic growth well in excess of 3% to become revenue neutral. Otherwise, the deficit will blow out faster and rates will need to accommodate twitchy investors who will be demanding higher yields in return.

Add a tariff war with China and the U.S. allies, global growth is in a strange place. The market feels as if it has one last sugar hit before the fun stuff is taken away.

The Fed, however, appears to be suggesting how they feel about the U.S. economy and that is not so good. The guidance is that the Fed expects two more rises this year. For equities, this means back to the drawing board of valuations. The bond market reacted in a muted fashion and equities were equally sanguine.

What we should be concerned about though is the dwindling personal savings rate. Like Australia, the U.S. has binged on credit card debt and that is alarming as savings rates have slumped. It is estimated that 70% of the U.S. economy is driven by consumers who are simultaneously funding spending through debt and running down savings.

The IMF published their findings and on U.S. personal savings rate since 1961 and it is now about 2.5% and approaching 2% the level just preceding the 2008 crash.

A significant fall in savings rates is not good when mixed with interest rates climbing and widening deficits. Currently, everything is being held together by the glue of rising equity prices and this is a risky game. A large fall in the equity market would precipitate a recession or prolonged stagnation.

So, on the day, equity prices were volatile. As expected, the broader indices suffered falls in what was a rather choppy day. The bond curve flattened 5 to 30 years to a level that was the flattest since 2007 to narrow into 24.4bp.


Equities: The S&P fell 0.4 %. The Dow fell 0.47% and the Stoxx fell 0.4%.

Currencies: The Bloomberg Dollar Index fell 0.1%. The euro rose 0.4% and the yen rose 0.1%.

Bonds: The ten-year closed around at 2.97%. The 2-year closed at 2.57% and the 30-year closed at 3.092%. The ten-year bund closed at 0.476% and the UK gilt closed at 1.363% and the OAT closed at 0.786%.

The U.S. curve closed the day with the following closes 2/10 at 39.6 bp, 2/30 at 51.6 bp and the 10/30 closed at 11.8 bp. The U.S. 5-year closed at 2.837%.

Commodities: WTI rose 0.5% and gold gained 0.3% and copper gained 0.3%

Bitcoin is trading at around $6289.

Aussie Market Today.

Expect to see some buying of bonds and equities to be a little weaker on the day.