We’re often asked by clients why Washington has become so polarized and if there is any relief in sight. In today’s report we offer a list of reasons why American politics has become so polarized. Even a cursory review of the list offers little hope of any near-term improvement. The implication for investors is clear: especially over the next two years, it will be very difficult to build bipartisan coalitions in Congress for comprehensive solutions to some of the nation’s most pressing problems.
Our clients are often perplexed by the behavior of peripheral EZ yields vs. US yields – how is it possible that Spanish government bonds yield less than US Treasuries? We show why current government bond pricing is only seemingly unnatural and in fact it is a natural consequence of four important factors. Looking ahead, we discuss whether recent trends are likely to continue and what circumstances could lead to a change in the outlook for peripheral EZ bonds. We also update our estimate of how much low EZ yields are holding down US yields.
The potential merger of Burger King and Tim Hortons is not likely to change the politics of inversions to any meaningful degree. In fact, the nature of the deal underscores the differences between the inversions of a decade ago that caused a public backlash and the more recent inversions, which have not produced much of a public reaction. We discuss this deal and the outlook for corporate inversion policy more broadly in today’s report.
At Jackson Hole, Draghi raised the odds once again of QE in the EZ by saying that the ECB “stands ready to adjust the policy stance further.” Those are strong words for a central banker. The market won’t wait to see if the ECB will in fact do QE – the higher odds of QE should be reflected soon in asset prices. In this note we discuss the impact of a potential large-scale QE program in the EZ on German yields, peripheral yields, and equity markets.
The key sentence from Draghi’s speech at Jackson Hole was this: “I am confident that the package of measures we announced in June will indeed provide the intended boost to demand, and we stand ready to adjust our policy stance further.” With this sentence he accomplished two things: 1) He communicated that the ECB is in no rush to take additional action because he wants to give the current “package of measures” a chance of working. 2) At the same time he lowered the threshold for such additional action. “Standing ready” to adjust the policy stance is a relatively strong … Read More
- What was noise and what were the policy signals from the Fed this week?
- The Jackson Hole speech reflected the real Janet Yellen.
- What is the market pricing in vs. what the Fed is thinking?
- Why market expectations of Fed tightening are important for yields. Read More
The idea of a government shutdown was back in the news this week with comments from Senator Mitch McConnell and Congressman Paul Ryan. McConnell seemed to open the door to a shutdown, while Ryan ruled it out. Our view is this: a government shutdown this fall is very unlikely. However, if Republicans pick up the Senate, next year they are likely to use whatever leverage they have to force policy concessions on Obama, and that could mean attaching controversial riders to bills funding the government, raising the debt ceiling, or potentially other “must pass” legislation.
The minutes of the July FOMC meeting released yesterday highlighted that the debate inside the Fed is on whether to raise rates in June 2015 or earlier. It is not about whether to raise them at all or the pace at which they should be raised. The market broadly agrees with the Fed in terms of the timing of the first rate hike, but it is very far from the Fed in terms of the pace of subsequent rate hikes. This discrepancy helps explain why yields are so low across the yield curve. We quantify how much subdued policy expectations … Read More
Although the market and the Fed agree on the likely date of the first rate hike – June 2015 – they disagree on the pace of rate hikes, with the market pricing in a much more dovish trajectory than the Fed has been communicating. Today’s minutes of the July FOMC meeting underscore that the Fed is likely to proceed with its plan, regardless of what the market is pricing in.
I will have more tomorrow in our regular note, but for now these are the main takeaways from the minutes. Read More
Tuesday’s Alaskan Republican primary was the last of the major primaries, so the field of candidates is now set for the midterm elections. In today’s report we publish our odds for Republicans picking up the Senate, discuss why we give the GOP the edge, and list the major investment implications. Republicans are also likely to pick up seats in the House. A Democratic takeover of the House would require an almost unimaginable change in political fortunes.