Warning, Warning, Warning!
Bond markets and equity markets are diverging. Equity markets in the U.S. are running hot and those gains are predicated on Trump delivering. To date there is no evidence that Trump can or will, given the combative nature of himself, cabinet and spokespeople. There is simply no evidence to support current equity levels other than optimism. Earnings have been higher in a number of companies, but those have generally been not associated with retail and manufacturing. Rather the real earnings winners have been IT, Medical or software. Retail has struggled and continues to lag badly as spending is down and so too the velocity of money.
What is really interesting to note is that lending growth is stalling. Demand for loans has stalled. This is partly due to uncertainty in policy. Currently, lending is running at about 5% (Fed data) and this is down from 6.4% for the whole of last year and a high of 8% mid 2016. Trump has to assuage any market fears when he addresses Congress on the 28th February, and he has to commence providing policy guidance.
On the basis of no guidance as yet a skeptical bond market has rallied the U.S. 10 year treasury to 2.30% from a high of 2.6% in December. Bond investors are taking the view that much of Trump’s rhetoric and commentary cannot or won’t be implemented for some time. Bond investors are rarely wrong. And another ominous signal is that investors are moving back to high dividend paying stocks. The U.S. treasury curve flattened with the 5/30 year now having a basis of 110bp. Thus indicating the bond market believes that growth and inflation will be less than the equity market is expecting. Volumes in equities remain low.
There are reasons to remain concerned. Trump’s comments to date have been rhetoric with little policy and his now Cabinet Minister Mnuchin suggests that rates will remain low suggest that Trump and his Cabinet believe that the economy will take time before growth really commences.
There are reasons to remain skeptical especially has the Trump Team have failed to deliver any commentary surrounding policy, that to date the immigration policy was badly flawed and we have already seen a key member of Trump team forced to resign. Without policy there is little reason for the equity market to hold onto the current gains other than optimism to hold the equity market at current levels.
Aussie Market Today.
Another record day for equities should see the Aussie market continue to rally. Overnight US treasuries rallied and that bodes well for the domestic bond market. Credit was tighter so I expect on the day we should see a small rally across the asset classes. Iron ore was steady on the day. The USD was slightly weaker due to comments that rates could remain low and the AUD should remain steady.