The S&P500 Index (SPX) is once again flirting with its 20 day moving average which has defined underlying support for the SPX since the current rally began with the Trump election victory. The SPX has not had consecutive daily closes below its 20 dma (the blue line in the following chart) since early November; it has touched its 20 dma numerous times but closed below it only once. The pattern continued last week when the SPX rebounded after trading just below its 20 dma on Thursday.
On Wednesday of this week, the U.S. has a debt ceiling again. Since the deal between Speaker John Boehner and President Obama in October of 2015, the debt ceiling has been suspended, allowing the President to borrow as much as he wanted. Not anymore. Now the Treasury will be limited to borrowing no more than what is outstanding on March 15th, approximately $20 trillion, unless Congress ups the limit.
Fed heads from A to Z have spoken in the last week. They have declared with one voice that the Fed Funds Rate will be raised at their March 15 meeting. They say it is because the economy is strengthening.
No. I have seen all kinds of ‘explanations’ but none of them work for me. As Dorothy said in the Wizard of Oz, this isn’t Kansas anymore. We have come to a very strange place indeed.
What is the most crowded trade in the world? Why, the U.S. dollar of course. And it’s becoming more crowded by the day. Here’s the Merrill, Lynch take:
I was wrong. The Trump inflation trade is back with a vengeance. Stocks and the dollar are up, bonds and gold are down (not a lot). Speculation over the Trump tax proposals (Trump called them ‘phenomenal’ last Thursday with no details) got the mania going again. Sentiment is now at all-time record highs for stocks and the main indices are making new highs every day.
Remember what the Trump story is all about? His policies will drive economic growth higher, inflation will rise, the Fed will need to raise rates faster and the dollar will soar. To see the story, all you had to do was look at short-term U.S. interest rates which were climbing fast after years of stagnation and deflation worries under Obama. That’s why the Trump trade is also known as the inflation trade. Buy stocks and the dollar and sell bonds and gold because bond yields are going higher.
The news is full of confidence surveys in which consumers and business people say how confident they are that the economy is getting better and the future looks bright. There’s just one little problem: they aren’t acting it. They aren’t walking the talk.
You may remember that I have been warning you that the next financial crisis will probably start in the bond market. And it does look like we are getting closer. As Bloomberg notes, EU sovereign bonds have handed investors the worst start to a year on record. Losses are mounting quickly.