Said Trump, we can all use $5K
To help with our life’s day-to-day
So, vote for the R’s
And your cookie jars
Will fill up with this bonus pay

The pundits are clearly united
That this idea’s crazy and blighted
But of more concern
Is buyers will spurn
The 10-year like love unrequited

I guess we cannot be but so surprised that populist President Donald Trump has said he will hand out $5000 to every adult US citizen if the Republicans retain both the House and the Senate during the mid-term elections.  He is, after all, a populist.  And that is what populists do; they promise things to the people to get elected.  While this may be abhorrent to the alleged ‘hard’ money analysts on Wall Street, it strikes me that this is a brilliant way to get those leaning Socialist to vote for the Republicans.  After all, their entire MO is to get money for no work, and that’s exactly what this is.  It is laughable to me that there is now concern that if this were to go forward, it would cost ~$1 trillion and ‘where would the money come from?’ is now the big question.  The money would come from where all the money for government spending comes from, more Treasury issuance.  

Which brings us to a more important question regarding markets, if there is a new line item in the 2027 budget, $5000 bonuses, how will the bond market respond?  Here the situation is very clear, yields continue to rise.  If you look at the chart below comparing 10-year yields with their counterpart TIPS yields, you can see that inflation is edging higher as a concern (nominal yields are rising more quickly than real yields).

Source: tradingeconomics.com

While I don’t believe this is a direct response to the Trump bonus plan, rather to the ongoing climb in oil and related energy prices, I’m confident the bonus plan is not helping the situation.  

This dovetails nicely with the other key topic of discussion in the market; how the Fed will respond to this information as well as the PPI/CPI data to be released later today and tomorrow.  I chuckled at the WSJ headline, A Tiny Shift in the Inflation Rate Could Decide the Fed’s Next Move as the implication is that if the M/M reading for core CPI is 0.2%, the Fed will stand pat but if it is 0.3% it will hike.  And maybe that is the way things will work out.  But if that is the case, it sure seems to me like they would be missing the forest for the trees.  This is especially so since Chairman Warsh was explicit in that he wanted to see the underlying trend, and as we all know, a single data point does not a trend make.

Currently, the Fed funds futures market is back to pricing a 64% probability of a rate hike next week, although as per the below chart from rateprobability.com, you can see that the Fed appears to be one of the most dovish central banks around.

The ECB is virtually guaranteed to hike 25bps this morning and are priced to hike 3 more times during the next 10 months.  I keep wondering how they reconcile a Eurozone economy that is barely growing with hiking rates to reduce demand, and by extension, inflation.  This is where Keynesianism has a really hard time.  In fact, one of the big benefits of Kevin Warsh not having a PhD in economics is that he has never been indoctrinated into that school of thought.

In fact, if you recall Warsh’s first press conference, he lauded the bond market for doing the Fed’s job, raising the cost of funding so the Fed didn’t need to move.  Well, after a lull, the bond market is doing the hard work again.

As an aside, Secretary Bessent’s bond buybacks will take place today and, certainly in no surprise to me, the amount has been increased to $6 billion.  (Remember the ‘at least double’?). In truth, I expect that this program will increase in size each week going forward and ultimately become meaningful with respect to the size of the bond market.  Of course, looking at the bond market’s pricing today, with yields rising another 2bps, the punditry is once again calling out Bessent for not being able to do what he explained.  Funnily, though, they have stopped talking about the yen continuing to decline even though they were quick to dismiss Bessent’s activities there as well.  Personally, I’m going to wait a little longer before I declare the program a success or failure!

Ok, let’s turn to markets this morning.  Oil (+1.7%) continues to climb as the Iran conflict is showing no signs of cooling off.  It is not hard to see the trend in the chart below, and it is not clear what will alter this trend absent a major change in Iran.

Source: tradingeconomics.com

At the same time, the metals markets are under pressure this morning, with copper (-4.75%) leading the way lower and taking gold (-0.3%) and silver (-2.2%) down as well.  I don’t believe anything has changed with respect to the long-term prospects of metals, but they are quite volatile and always have been.  Copper has been subject to tariffs and the LME – COMEX spread and arbitrage is a key part of the price action there, dwarfing fundamentals right now.

But higher energy prices have weighed on risk appetite everywhere with equity markets struggling in most places around the world.  Yesterday’s US weakness was followed by a general decline throughout Asia (China -0.5%, HK -1.3%, Australia -1.0%, Taiwan -0.5%, Indonesia -1.3%) with only Tokyo (+0.2%) bucking the trend.  The only real news came from Down Under where two RBA members were explicitly hawkish, essentially promising a rate hike at the end of this month and the market has priced in two more going forward, a tightening of expectations.

In Europe, though, despite (because of?) the imminent rate action by the ECB today, equity markets are mixed with some gainers (Italy +0.4%, Spain +0.3%) and some laggards, (UK -0.4%) with Germany essentially unchanged.  There has been no data to alter any views, but I guess we will need to hear what Madame Lagarde has to say later this morning.

Quickly, European sovereign yields are little changed this morning but broadly continue to follow Treasury yields higher and JGB yields (+3bps) bounced after their recent dip.  Recall, I mentioned this pattern yesterday.

Finally, the dollar remains generally quiet, although in the last few hours, we have started to see a bit of dollar strength.  JPY (-0.4%) is edging lower as are NOK (-0.7%) despite rising oil prices and ZAR (-0.45%) because of declining metals prices.  However, most other currencies remain +/-0.1% from yesterday’s closing levels.

On the data front, we get a bunch today.

Initial Claims	205K
Continuing Claims	1780K
PPI	0.4% (5.3% Y/Y)
Core PPI	0.3% (4.6% Y/Y)
Existing Home Sales	3.98M

Source: tradingeconomics.com

We also see the EIA oil inventory data with a slight draw expected.  I suspect that the ECB is likely to be a nonevent and that PPI, unless it is dramatically different than forecasts, will also have a limited impact.  Oil prices are back in the driver’s seat so we will have to see if this rally continues, or it is, like we have seen in both bonds and yen, speculative driven.

Good luck

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