Let’s Party ‘Til 2024!

That’s what Larry Kudlow, Trump’s economic adviser said today. Well, at least he said no recession on the horizon to 2024. I don’t know what Larry knows but with the prospect of a trade war getting nastier and U.S. economic growth as forecast by most economic sentinels slows in the coming years, it’s hard to see how Larry gets to his numbers.

Sure, a tax cut helps businesses pay bigger bonuses, dividends and allows share buybacks. But that’s not capex, not much money flows back from those activities. And maybe, just maybe, the equity market was looking for a good news story and Kudlow provided that.

Powell probably was the reason why the equity market rallied. Powell’s comments soothed anxieties and this allowed the equity market to rally a little and caused bonds to pause. The Fed’s policy at present is softly softly. They have concerns about trade tariffs but the data has inflation and employment on trend. This means the tightening cycle will be measured with no unexpected shocks.

Of most interest will be how the yield curve continues to react and if the curve can shake off its flattening cycle.  Most pundits believe that the long end could ratchet down whilst the front-end offsets the rally by rising higher in yield. Bouts of risk aversion are also assisting in keeping the curve sloping upwards.

U.S. housing starts fell 12.3% in June, whilst permits dropped 2.2%. Some of the falls are being attributed to increased costs due to tariffs imposed on Canadian softwood lumber, for example.

Across the pond, however, things were a little different. Concerns over the European growth story has bunds rallying. ECB policy expectations are a bullish driver for euro bonds in general. Whilst in the long end, the demand for yield is driving prices higher leading to demand for higher-yielding bonds from the peripheral states such as Spain. Demand is also seen for countries such as France and Belgium.

Conditions are so good now for bond issues, so much so that Greece is looking to tap bond markets. Greece required 3 bailouts to save its economy, is rated non-investment grade and at 180% does not meet the required Euro debt to GDP ratio. It needed about 260 billion euros in financial aid and the ECB would hit its limits at around 3 bio euro. It will be the last member state to come off life support after Ireland 2013, Spain and Portugal in 2014 and Cyprus in 2016.

Recap. 

Equities: The S&P rose 0.2% The Dow rose 0.3%. The Stoxx 600 rose 0.5%.

Currencies: The Bloomberg Dollar Index rose 0.1% while the euro fell 0.2%.

Bonds: The ten-year closed around at 2.875. The 2-year closed at 2.615% and the 30-year closed at 2.989%. The ten-year bund closed at 0.282% and the UK gilt closed at 1.226% and the OAT closed at 0.568%.

The U.S. curve closed the day with the following closes 2/10 at 25.8 bp, 2/30 at 37.5 bp and the 10/30 closed at 11.5 bp. The U.S. 5-year closed at 2.773%.

Commodities: WTI rose 1.2% while gold was unchanged.

Bitcoin is trading around $7,343.

Aussie Market Today.

Equity markets should rally on the day. Bonds should be steady although there is the risk they can drift higher in yield. All bets off of course if the tariff spat between the U.S. and China accelerates in intensity.

Geopolitical risks remain high.