Cracks in the Veneer?

The equity market rallied today and some of that rally could be attributed to a) no trade barriers with Canada b) the phenomenal tax plan coming and c) fiscal stimulus coming as a result of infrastructure spending. The Vix continued its decline and that implies that markets are becoming very complacent about current conditions and that the equity markets see few storm clouds ahead. The level of the Vix s not too dissimilar to level in 2007 just prior to the sub-prime collapse in the market and previous to that in 1994 when bond rates rose.

While the equity markets were rallying the bond market was busy selling, albeit in relatively low volumes. The bond market is looking for direction from the Trump Administration and seeing what Yellen has to say about the economic outlook. At stake is a Government that is rapidly losing some credibility with some cracks appearing in the Trump Administration over Flynn’s appointment as security adviser, comments from Goldman’s Chief Economists doubting the perceived benefits that Trump ‘s stimulus package is to bring to the economy and the view taken by some emerging market countries that Trump is all bluster.

The Goldman’s economists have been hard at work looking at Trump’s stimulus package and are concluding that Trump won’t be able to jumpstart economic growth. At issue is the lag time of announcement to implementation that package is at least 2 years however the negative aspects of policy will impact immediately.  Goldman has looked at Trump’s plans and run those assumptions into the Fed’s economic model  and the results are negative. Their view is that the fiscal stimulus fades over time wile the limits on the labour force remain.

The Goldman’s view is that the economy grows in 2017 and 2018 but policy then weighs on he economy. What impacts on growth is a reduction in workforce due to immigration, tit for tat tariffs, and productivity declines. Goldman used a fiscal stimulus of $450 billion.

On the day equities had  a good run, US ten years weakened by about 4 bp to close about 2.43%. participation in the US treasury market by foreign interests is declining and with time this could be  problem as the US enjoys a lower interest rate environment because of these foreign investors. The Europeans and Japanese have been notably less active since December. Some of the lack of interest in the US bond market is because of the stronger USD and uncertainty over policy under the Trump Administration.

Aussie Market Today.

Strong commodity prices persist although they were weaker on the day. Iron ore was up about 2% and that bodes well for the resource sector and should maintain higher equity prices for the resource sector . Bonds were weaker and the Australian bond market will probably weaken in line with the US treasuries. Oil was weaker on the day.