STATE THE UNION.

Today was the day when Trump was going to provide his vision for the future of the American people. What Trump did however was appeal to his voting bloc and schisms that enabled him to win the Presidency. Trump focussed on immigration on allowing people with the rights skills to remain, infrastructure provided a light touch on trade and of course took full credit for everyone who got a bonus this year. Oh yes, of course, in Li’l Kim as well.

Unfortunately, that won’t propel the U.S. too far. Issues such as productivity, best left to other speakers, is not rising. Visa holders in engineering, medicine, science and computing are having their visas revoked and employers are raising concerns about a steady brain drain as a result of Trump’s policies.  His rhetoric is such that the country remains sharply divided down partisan lines. His rhetoric on trade is confusing his allies and, in the case of South Korea, quite possibly pushing Korea to look for alternatives as allies.  Trump’s comments did not, however, cause any dislocation in the U.S. equity markets as the equity markets rallied during the day.

Bonds were on a different page. The yield curve flattened because the Treasury announced it favoured selling shorter dated paper over longer dated paper. The selling of the long end earlier in the day ceased as the initial fear of many traders that the government favoured issuance into the longer maturities did not materialise. The traders then focussed on the shorter papers.

A rate hike is now expected in March. The Fed is anticipating an increase in inflation. Inflation is expected to stabilise around 2%. The view of three rate hikes over the year remains intact. Equities rallied after the release of the Fed statement.

The U.S. economy grew 2.3% in 2017 and the tax cuts are expected to push growth rates higher. Several Fed members have suggested that the $1.5 tr tax cuts could provide an economic lift in growth.Equities, after initially rallying, gave up some gains post the release of the Fed Minutes. The selloff in equities was attributed to the increase in Treasury yields and an expectation that central banks will ease away from stimulus. Analysts expect fourth-quarter S&P 500 earnings to grow around 13.7%, up from 12% expected at the start of the month. So far 37% of companies have reported their fourth-quarter results and 80% have exceeded consensus estimates.

Recap: 

Equities: The S&P 500 fell 0.3%. The Dow fell 0.1%. The Stoxx 600 fell 0.2%.

Currencies: The pound rose 0.3%, the euro rose 0.3%, the Bloomberg Dollar Spot Index was down 0.2%.

Bonds: The ten-year hit 2.718%. The 2-year closed at 2.145%. The ten-year bund closed at 0.637% and the UK gilt closed at 1.506% and the OAT closed at 0.967%. The U.S. curve closed 2/10 at 57.3bp, 2/30 at 80 bp and the 10/30, edged flatter to close at 22.6bp. The U.S. 5-year closed at 2.527.

Commodities: Gold fell 0.2% and WTI rose 0.3 %. Miners in the U.S. will get a boost as Trump has moved to withdraw Federal protections from millions of acres of Utah wilderness to mining under a Wild West-era mining law that dates back to 1872.

Aussie Market Today.

The long end of the bond market could see some gains as the U.S. long end looks stable at the moment. Shorter maturities are rising, and many banks will be focussing on the U.S. 5-year which is the bellwether for Australian mortgage rates.