Treasury Prices Rally

OVERNIGHT

Global equity markets overnight were generally lower with a 1.2% decline in the Spanish market the largest washout. Some analysts think the slide in equities was the result of a fresh wave of tariff concerns from the incoming president elect against key US trading partners Canada, Mexico, and China. Critical economic news released overnight included a slight increase in Japanese corporate service Price Index readings for October, and a slightly smaller than previous decline in a BRC Shop Price Index readings for November (GBP). In today’s US trade action, a US housing price index reading for September is expected to remain steady while the S&P Case Shiller home price indices for September are expected to tick downward from a very high level. There are no estimates for US consumer confidence in November, but expectations call for a moderation in October new home sales. Lastly the Richmond Fed manufacturing index for November is expected to show a slightly smaller contraction than was seen in the prior month, there will be a five year note auction and the release of the previous FOMC meeting minutes will be seen in the afternoon trade.

INTEREST RATE MARKET FUTURES

Apparently, the treasury market has had second thoughts about the sharp push higher in interest rates from the end of September (a decline of more than 12 points) with concerns surfacing that the exploding US debt issue will not be resolved by the change in Washington leadership. In fact, in a countervailing fundamental reaction, treasury prices have rallied off fears surfacing in interest rate swap spreads of defaults in parts of the $532 billion interest rate derivative market. Keep in mind, markets can trade counter to classic fundamental relationships especially in a historically fundamentally twisted interest rate market. However, the bull camp should be supported in the term from short covering, dovish comments from the Minneapolis Fed Pres. and from solid demand for yesterday’s two-year treasury note auction. It should be noted that today the treasury will offer five-year treasury notes at auction and given the jump in yields since September we suspect that supply will also be taken down definitively. While the markets may react to housing data this morning, the FOMC meeting minutes later today could set the tone into the close Wednesday. On the other hand, expectations for a December 18th rate cut have declined to 59.6% from above 90% a couple weeks ago and therefore a generally dovish take remains in place but might not be a powerful addition to the current rally.

CURRENCY FUTURES

At least for the time being, the optimism toward US dollar following the GOP power shift has temporarily run its course with doubt the incoming administration will have a free hand. It is also possible that weakness in the dollar this morning is the result of a slightly dovish shift in treasury market sentiment, renewed concerns of tariff inspired US economic slowing and signs that opponents of the incoming administration will be aggressive in their opposition to a sea change shift in Washington polices. In fact, overnight stories out of London suggests that the currency markets could exhibit their own version of bond vigilantism by pushing the dollar to unprecedented levels which combined with tariffs could deal the US economy a serious blow from declines in exports! In conclusion, residual optimism toward the incoming administration, and bullish speculative interest in the dollar should leave the dollar uptrend entrenched. In fact, a setback in the dollar from a dovish FOMC meeting minutes release, soft US data and selling pressure from international players should be seen as a buying opportunity. Unfortunately for the bull camp in the euro, internal fundamental European developments are likely to take a backseat to US dollar developments leaving the bear camp with the edge. Furthermore, with factions inside the ECB concerned about “below target inflation” the bear camp does have bearish internal fundamental ammunition.

STOCK INDEX FUTURES

While the initial lower-low today suggest a back and fill bias is in place to start today the overall fundamental structure of the bull case remains in place. In fact, bullish sentiment toward the small Cap sector (with those shares nearing all-time high pricing) highlights investor confidence in the bull case. However, renewed concerns of negative ramification of US tariffs on key trading partners (Canada, Mexico, and China) are certainly prompting profit-taking. Furthermore, big tech regulatory woes continue against Google in Europe, Google/meta in Australia and Tesla which is reportedly facing disqualification from EV tax credits on vehicles sold in California. Fortunately for the bull camp, preholiday optimism, recent technical balancing and the potential for lower interest rates in the short term should underpin against further corrective action.

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