Said Janet, I know we’ve been spending
Too much, but you’re not comprehending
I’ve plenty of cash
So, there’ll be no crash
Instead, stocks will keep on ascending

Til Wednesday, we’ll keep the suspense
But really, it’s just common sense
Chair Powell and I
Will help the Big Guy
And policy ease will commence

Well, the first shoe dropped yesterday afternoon as the Treasury explained that they would “only” be borrowing $760 billion in Q1, a solid $56 billion less than had been expected by the market as of yesterday morning.  With that significant reduction in potential Treasury issuance, the bulls went nuts and both stocks (+0.75%) and bonds (-7bps) rallied.  A cynic might believe that Secretary Yellen was trying to manipulate the stock market higher, but we all know that could never be the case.  At any rate, this sets us up for Wednesday when first thing in the morning we will see the Quarterly Refunding Announcement (QRA), where Yellen will describe the ratio of short-dated T-bills to long-dated coupon issuance, and then at 2:00, the FOMC Statement will be released with Chairman Powell speaking at the press conference 30 minutes later.

Given the excitement over yesterday’s events, I suspect that at least one of the two events tomorrow will be dovish rates/bullish equities but have no idea which way it will play out.  In the end, though, it doesn’t really matter.  Ultimately what we have learned is that Yellen is running the show, and all Powell can do is respond.  The one thing I have to wonder is, what if the government spends more than the $760 billion in Q1?  Where will that money come from, and what will the impact be on the markets?  (Obviously, they will simply borrow more, but it will not be an issue as there is no limit these days, nor for an entire year going forward.)  However, for now, that is just a concern for grumpy old men like me.

In China, though they have announced
More stimulus and stocks first bounced
It seems traders feel
Xi ain’t got that zeal
So, sellers once more have all pounced

You may recall last week when the Chinese stock market rallied sharply after a series of announcements regarding government support.  First there was the story of CNY 2 trillion of cash that would be coming home and invested in equities and then the PBOC cut the RRR by 50 basis points, freeing up another CNY 1 trillion.  These moves were supposed to demonstrate that Xi was going to fix things.  And he did…for a week.  But now, equity markets in both Hong Kong (-2.7%) and on the mainland (-1.8%) are falling again as it seems market participants have come to believe that there are too many problems for a mere CNY 3 trillion to fix.  And they could well be correct.

After all, China has been inflating their economy for decades and the property bubble they have blown is not nearly popped yet.  While this could be a modest correction in the beginning of a trend higher, I have a feeling that the fundamentals have a long way to go before they make sense for international investors.  With the European economy having stagnated for the past 5 quarters and the US moving an increasing amount of business to Mexico from China, it will be tough sledding in China, I fear.  Ultimately, I continue to believe the renminbi will suffer as it will be the most likely outlet valve.  But for now, I guess they can stand the pain.

And those are today’s stories as the market braces itself for tomorrow’s QRA and FOMC, Thursday’s BOE and Friday’s NFP data.  In the meantime, let’s recap the rest of the overnight action.

Despite the robust performance in the US yesterday, only Japan and Australia managed to show any signs of life in Asia overnight as China dragged down all the other regional markets.  This cannot be too surprising given the importance of the Chinese economy there, and if it is lagging other nations are going to struggle as well.  Europe, however, is having a much better go of it, with gains across the board, led by Spain’s IBEX (+1.25%) after both real and nominal GDP rose more than expected with inflation ticking higher alongside economic activity.  That may not bode well for the inflation story in Europe, but for now, everyone’s happy and the ECB comments have all pointed to rate cuts by the middle of the year.  As to US futures, at this hour (7:45) they are just barely on the red side of unchanged, with no market even -0.1%.

You will not be surprised that European yields slipped yesterday after the US bond rally as the combination of a prospect of lower yields in the US alongside the slightly more dovish talk from the ECB speakers was plenty of catalyst for a bond rally there.  While yields have edged back higher by 2bps or 3 bps this morning, they remain below yesterday morning’s levels.  In the US, Treasury yields have continued their decline, down another 1bp overnight while JGB yields have edged down another 1bp as well.  One other market to note, China, saw yields slip 3bps overnight and they are now at their lowest level since the early 2000’s as the market anticipated further policy ease from the government and PBOC.

Oil prices (-0.65%) are off a bit this morning as they continue to consolidate last week’s gains.  Clearly there is still concern regarding the US response to the attacks on its base in Jordan over the weekend as the intensity of that response is still completely unknown.  Weakness in China is not helping the oil market and European GDP data has also worked against the demand story, so uncertainty remains the watchword.  As to gold, it is continuing to creep higher but remains in its recent 2020/2060 trading range.  Lastly, the base metals are a touch softer this morning, but only a touch.

Finally, the dollar is a bit softer this morning after a benign day yesterday.  In a way, this is surprising as I would have expected the greenback to slide alongside Treasury yields, but I guess given the broader dovishness from ECB and other central bankers, on a relative basis not much changed.  As well, traders are reluctant to take large positions ahead of tomorrow’s big QRA and FOMC announcements.  As such, I suspect that we are going to see a very quiet session here across the board, just like we had overnight.

On the data front, while not as exciting as tomorrow, we do see Case Shiller Home Prices (exp 5.8%), JOLTS Job Openings (8.75M) and Consumer Confidence (115.0) this morning.  I keep listening to all the people who are telling me that falling housing prices are going to drive inflation lower, and the only reason the CPI and PCE calculations aren’t already lower is because they both have them at a lag.  Then I look at Case Shiller and say, what falling housing prices?  Anecdotally, in my neighborhood, we continue to see bidding wars and homes selling above asking.  If rates are really going to come down further, I suspect that will only drive that process even further.  The deflation story just makes no sense to me.  But anyway, probably not much today and all eyes are on tomorrow.

Good luck
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