April 10. Xi supports US stocks. Bonds…not so much
–China’s Xi warned against a ‘cold war mentality’ as US/Russia relations slip into a deep freeze with US sanctions causing a plunge in the ruble (amid pending military decisions in Syria). Xi also indicated he would take steps to open China’s markets, for example, to autos. The result was a yoyo ‘risk-on’ rally, after yesterday’s late afternoon sell-off prompted by the FBI raid on the homes and offices of Trump’s personal attorneys.
–Today’s news includes PPI, expected +0.1 with Core +0.2, and NFIB small business optimism, which remains robust, expected 107. Treasury auctions 3 year notes today, followed by 10’s and 30’s Wed and Thursday. The market will gauge foreign demand as the avalanche of supply continues. China opening markets, but closing the wallet that funds US deficits? Not helping matters is news that the CBO raised US deficit estimates to over $1 trillion by 2020, essentially matching forecasts that Primary Dealers had already made (as mentioned in weekend piece). In the future, Primary Dealers, cover your work so the CBO can’t copy off you. I guess that leaves OMB dangling out there with a $450 billion deficit estimate in 2020, pulling down the curve. Treasuries have been less prone to flight-to-quality bids as the weight of future supply tempers impulse buys. And if signs of slower economy DO create demand for yield, that money will be siphoned away from stocks this time, without central bank QE floating all boats.
–Implied vol in rates pressed lower yesterday, with treasury vol across the curve at new lows. I marked TYM at just 3.5, 121.0^ 1’14s.
