Flashing again.

At a time when the U.S. may need to stimulate the economy, the coffers may well be bare. The budget deficit is growing and spending is now double what is being received in revenue.

For example, in November, outlays jumped 18% to $411 bio whilst receipts were little changed at $206 bio. The gap last year at the same time was $139 bio. The first two months of the fiscal year that commenced on October 1 have widened from $201.8 bio to $305 bio (according to Bloomberg).

This paints a picture that even as the economy grows, spending is growing at a faster pace whilst tax revenue remains steady or is falling. This is not supposed to be the result.

For a number of economic analysts, the growing deficit is posing a problem. Many see a slowdown later in 2019 and a relatively weak economy in 2020. The CME Fed Funds probability of a rate hike say as much.   The general theme over the coming year is for growth to slow to less than 2%. That should be good for risk off assets such as bonds, non-agency mortgage-backed securities, and municipals.

For the equity market, the lights are flashing again. Today the equity market fretted about China escalating the tensions between the U.S. and Canada as another Canadian was detained in possible reatliation for the Canadian arrest of the Huawei CFO.

This simple gesture dashed the hopes that arose when China made its first purchase of U.S. soy bean in 6 months. For the equity market, trade and the likelihood of trade tariffs being removed are driving market sentiment. Defensive stocks are more in vogue.

Theresa May survived the Brexit vote, just. To appease members, she was allowed to proceed with negotiations. However, she won’t lead the party into the next election. It was a bittersweet moment.

Treasuries had an interesting day today. Treasuries moved pretty much in lockstep with the German bunds and the news of the day was from the ECB. The ECB’s forecast is for reduced growth and lower inflation. That comment caused bunds to rally and elsewhere bonds rallied.

Jeffrey Gundlach made an interesting observation today that for every $600 bio unwind by the Fed, that’s equivalent to three rate hikes. Gundlach is bearish on equities and suggested the unimpressive bond rally (given the distress in the equity market) is due to the weak fiscal position of the U.S. with the ever-growing deficit and the Fed hiking rates. He sees the S&P 500 falling below the low in February.

The 30-year treasury auction was solid with commentators suggesting the weak outlook offered by the ECB was the reason. Bid to cover was 2.31s 2.38 (average), indirects took 66.4% vs 61.4 (average), direct bidders took 11.5%. dealers picked up 22%.

 

Market Recap.

Equities: The S&P 500 was flat down 0.04% and the Dow rose 0.29%. The Vix closed at 20.57 while the Stoxx fell 0.2%

Currencies: The Bloomberg Dollar Index rose 0.2% while the euro fell 0.1% and the pound rose 0.3%.

Bonds: (as at 4.00pm). The ten-year is trading at 2.913%. The 2-year is trading at 2.76% and the 30-year is at 3.168%. The ten-year bund closed at 0.288% and the OAT closed at 0.737%. The U.S. curve closed on the day with the following closes 2/10 at 15.1bp, 2/30 at 40.6bp and the 10/30 closed at 25.3bp. The U.S. 5-year closed at 2.753%. The 10-year yen gilt is trading 0.055%.

Commodities: WTI rose 3.7% while gold fell 0.2%. Copper fell 0.18% (Nymex Jan contract).

Bitcoin is trading around $3,261.95.

 

Aussie Market Today.

Equities to be a bit sluggish on the day. Commodities overnight were mixed and so too equities. With no major trend to follow, the direction out of Asia later in the morning will become even more important.

Bonds drifted higher in yield in offshore markets and that probably will be the trend here. The Aussie ITRAXX tracked tighter again overnight so we could see some tightening in credit spreads.