Halister News

--DEREK WALLBANK

(Bloomberg) -- U.S. election outcome “does not change our view on the trajectory of the economy” for next 4-6 quarters, even as markets have repriced on the assumption that lower taxes, less regulation and more deficit spending will cause a demand shock and higher inflation, Hoisington Investment Management’s Van R. Hoisington and Lacy Hunt say in note to investors.

• For tax cuts to make a positive contribution to economy, monetary conditions must “remain favorable, not adversarial”
• Reagan tax cuts were far larger and implemented while interest rates were declining sharply; “even with fiscal and monetary conditions working in tandem, the economy was very slow to respond”
• Conditions today are initially “negative and have become more negative recently,” including total debt levels, expansion in its 7th year, rise in market rates putting pressure on velocity of money and money supply growth and disinflationary pressure from USD strength
• “Markets have a pronounced tendency to rush to judgment when policy changes occur,” were proven wrong about potential for 2009 stimulus and QE1 to ignite inflation
• Hoisington manages $5.9b, including Wasatch-Hoisington U.S. Treasury Fund (3.5% avg annual return over 5 years)

(Bloomberg) -- Italy-Germany 10yr yield spread may retain strong widening momentum, with focus on clearing the Brexit day wide of 192bps touched on June 24, Bloomberg technical analyst Sejul Gokal writes.

• See chart; spread now +4bps to 176bps
• Spread widened past 200-week MA at 168bps on closing basis last week
• Past 192bps, June 2015 high of 199bps will be in focus
• NOTE: BTP realized volatility approaching post-Brexit highs while decoupling between 10y BTP/bund spread and DAX extends further: MORE

• NOTE: Sejul Gokal is a technical strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice.

(Bloomberg) -- The link between the U.S. election result and next year’s vote in France shouldn’t be exaggerated, but BlueBay Asset Management is looking at the French presidential primaries with more interest, Mark Dowding, co-head of IG debt, writes.

• Moved to a short position in French bonds given the spread vs bunds remains very tight, Dowding says in e-mailed comments
  • If Sarkozy is elected as the right’s candidate, it’s plausible Le Pen could become the country’s president next year
• BlueBay is more wary of sovereign risks in the euro zone, paring sovereign spread duration, selling Portugal and reducing exposure in other issuers
• NOTE: French bonds may underperform peers on Le Pen risks: Nomura said last week

(Bloomberg) -- The moves in U.S. rates since the election result have further to run as markets likely pricing too few rate increases, too little supply and as term premium is still low on a historical basis, analysts including Richard Kelly write in client note.

• If the president-elect were to implement his campaign plans on infrastructure spending and taxes, that would imply at least four additional Fed rate increases over the next 2 years as well as the three TD Securities currently expects
• Calculates every $250b in infrastructure spending implies an additional 25bps of Fed tightening, while a percentage-point cut in average income-tax rate implies 32bps of hikes
• 10Y UST yield should stabilize around 2.5%-2.75% over the next three months, but could run further if the plan is much larger than expected
• Given unemployment near NAIRU and growing wage pressures, fiscal stimulus could have a greater impact on inflation expectations and risk premium; 10Y breakeven rate may rise to 2.25%
• The steepening of the curve is nearing a peak as any repricing of Fed moves will affect the 5Y sector most, while the belly of the curve will be most impacted amid convexity hedging and Treasury supply
  • ECB’s December meeting also a significant risk to the curve