A RELIEF RALLY CORRECTION, BUDGET HANDICAPS CONVICTION

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1 28 April 2017 A RELIEF RALLY CORRECTION, BUDGET HANDICAPS CONVICTION By David Ader, Chief Macro Strategist for Informa Financial Intelligence Ader s musings In the week just passed the bond market gave back some of the gains from its relief rally that essentially came with the French election results a week ago and relative easing of the mood over geopolitics. This is presumably a pause in the grand scheme of things on both accounts and not a definitive phew that shoots US interest rates on a particularly bearish schematic. At least not yet. In good part, maybe in entirety, the price action of the last week teases the prior range s break out but hasn t really challenged it. Technically speaking, it looks like there s an inverse Head & Shoulders formation underway in 10s (which also makes an appearance in 30s and to a lesser degree down the curve) which along with rising stochastics and MACD makes me lean bearishly for the near term with a target initially of the 40-day MA around 2.39% to a series of prior yield highs from late March near 2.42+%. I don t usually lead with a technical story (oh, and I see a bit of steepening along with it) but it seems like folly to review the economic subtext or muse about the Trump tax plan because, well, it remains to be seen. It s certainly drama to see the infighting in the GOP, to attempt to extract a definitive story based on somewhat vague tax reform bullets, and then ponder the impact of the Continuing Resolution, but in terms of a longer-term impact on the bond market once again it remains to be seen. To find out more about Informa Financial intelligence, please visit financialintelligence.informa.com EPFR Global IGM imoneynet Informa Investment Solutions Informa Research Services ebenchmarkers

2 I may be talking my technical position up to say that I m anxious over the budget-deficit expanding impact of the tax plan even in a somewhat diluted version from what Trump is proposing at a point in history where demographics (think entitlements) and generically slow growth were going to boost the deficit anyway. The New York Times on Friday captured an important issue with the headline, For GOP, Deficit Takes A Backseat To Cutting Taxes. Where are Simpson and Bowles when we need them? The Committee for a Responsible Federal Budget, a non-partisan group, said the plan as proposed would reduce revenue by $3-7 trillion over the next decade requiring GDP of 4.5% to allow for self-financing. 4.5% GDP? Are you serious? There s been like five quarters since 2000 that have seen that much growth. But I digress. The point is that at least for the near term the bond market should be worried about paying for that deficit via more issuance at the long end of the curve. This isn t a new story, of course, and you wouldn t think there s much concern given the rally since the December and March yield highs (i.e. top of the range). Maybe the bond market simply doesn t believe the tax plan will go through in anything like its current form or is thinking about the raw economic data. Or, maybe, the Administration s

3 willingness to change its various tunes keeps uncertainly rife. Indeed, the NFIB s most recent report saw the Uncertainty Index at 93. That s second only to the read in November. I mentioned that the raw economic data hasn t been overly robust from Retail Sales to Confidence to GDP. The amalgamated surprise indices reflect that already. That hasn t changed anyone s thinking on the Fed. December Fed Fund futures at 1.23+% have gained a bit with the recent retreat in the bond market but merely are back to where they spent most of March and early April, which means two hikes over the balance of the year. No news is no news. Speaking of no news, the market had little to say about the largely expected weakness in Q1 GDP. Even though that was weaker-than-expected with so many economists talking it down in advance to odd seasonals and weather and a host of other excuses, the non-reaction isn t all that surprising. Still, the slower pace of consumption (0.3% or the slowest since Q4 2009) might reveal more than odd weather. I mean, maybe the consumer is cautious for a reason such as real disposable income up at a paltry 1% pace. At least non-residential fixed investment rose for the fourth quarter in a row and at 9.3%. That is an encouraging sign in an otherwise pretty soft report though in context may prove a one off the average gain since Q has been 0%.

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5 David Ader is Chief Macro Strategist for Informa Financial Intelligence. For further information on our products and services, please see: Bringing 30 years of investment strategy experience to his role at Informa Financial Intelligence, David Ader has held senior positions at major investment banks and financial information firms as well as serving on investment policy committees and management teams. Most recently Partner, Head of Government Bond Strategy for CRT Capital, he headed the team voted #1 in U.S. Rates Strategy for the last 11 years and #1 in Technical Analysis for the last five years in Institutional Investor s annual survey. Informa Financial Intelligence obtains information for its analysis from sources it considers reliable, but does not guarantee the accuracy or completeness of its analysis or any information contained therein. Informa Financial Intelligence and its affiliates make no representation or warranty, either express or implied, with respect to the information or analysis supplied herein, including without limitation the implied warranties of fitness for a particular purpose and merchantability, and each specifically disclaims any such warranty. In no event shall Informa Financial Intelligence or its affiliates be liable to clients for any decision made or action taken by the client in reliance upon the information or analyses contained herein, for delays or interruptions in delivery for any reason, or loss of business revenues, lost profits or any indirect, consequential, special or incidental damages, whether in contract, tort or otherwise, even if advised of the possibility of such damages. This material is intended solely for the private use of Informa Financial Intelligence clients, and any unauthorized use, duplication or disclosure is prohibited. This material is not a comprehensive evaluation of the industry, the companies or the securities mentioned, and does not constitute an offer or a solicitation of an offer or a recommendation to buy or sell securities. All expressions of opinion are subject to change without notice.