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Episode 14: New Hampshire primary and bond yields

Episode 14 - Part 1

New Hampshire primary – How will Wall Street React? 

Published on: February 11th, 2020 • Duration: 7 minutes

In this episode, we talk about the surprises that occurred during the Iowa caucus. The uncertainties that the Democratic primaries are currently posing could provide a profitable, short-term trade for the U.S. Dollar once the New Hampshire primary results roll in. Then, we discuss the NFIB index and how the last reading came in lower than expectations, but still hit historical records. If the new reading comes in strong, small-cap stocks may experience a rally. Finally, in the After section, we review the US jobs numbers.

Woman stands in empty studio. On the back wall is a fluctuating line graph
06:52
  • This is Before and After from Refinitiv. I'm your host, Johanna Botta. 

    In today's before section, we'll be looking at the key New Hampshire Primary and the NFIB Small Business Optimism Index, which is released today. And in the after section, we'll be checking out the U.S. jobs numbers. 

    Things are heating up in the race to be the Democratic nominee in the U.S. Presidential election. Primary season kicked off last week with a bizarre Iowa caucus that produce a couple of very big surprises. A - Joe Biden did not finish in the top two. Indeed, he ended up in fourth place. And B -  Pete Buttigieg and Bernie Sanders tied for first place, which no one saw coming. A lot of Democrats got angry about the poor organization at the Iowa caucus, and felt that the system failed them. So now that the field has narrowed a bit, this next primary in New Hampshire is must see TV. Now, we don't take sides and we don't celebrate or denigrate whoever wins. But markets do care about this race, and investors often price in candidates based on how they think their policies will impact the U.S. economy. All that makes this primary a good short term trading opportunity and could also offer us some lessons that we might need later on in this busy political year. What we know about the candidates represents mixed information for the markets. Pete Buttigieg is the most unknown quantity, and we all know how markets feel about uncertainty. Meanwhile, Joe Biden is a well known political entity, and many investors consider him to be the potential candidate that poses the lowest existential threat to Wall Street. Biden's wealth tax policy is less than other Democratic candidates. He proposes a top marginal rate of 51.8% on labor and 43.4% on investment income. While Elizabeth Warren is at 53% on labor and 58% on investments and Bernie Sanders wants a top tax rate of 69% on labor and 55.8% on investment income! The current top tax rate stands at 40.2% on labor income. In other words, your paycheck in 23.8% on any income that an investment portfolio might generate. So if Warren slips in early primaries, investors might welcome the news, since she's long taken an aggressive stance towards Wall Street. But the reality is that Biden is viewed as Trump's most formidable opponent in a general election. And so if he pulls out of the race, we could see the S&P rally. A rollback of the Trump corporate tax cuts could see some dollar strength unwind. And if you don't think politics matters in the market, just check out this chart going back four years, such as after Trump's election victory. After the November 8th election result in 2016, the D X Y index rallied 8% until the close of the year. This is the biggest one month move we've seen and the D X Y until now. And it created an all time high at 104. 

    Bottom line - until now, the polls that explore a potential matchup with Trump have consistently shown Joe Biden as the winner. But if Tuesday night's results in New Hampshire go against Biden, which should see the dollar rally, or if he instead jumps back to the top of the Democrat heap, that Trump victory premium may take a hit. 

    It's always worth keeping an eye on the Small Business Index Survey in the U.S. Many analysts say the shifting composte of the employment universe has begun to favor small businesses. The environment for manufacturing has obviously been bleak, so perhaps it is a tale of two economies. It's no secret that Main Street is driving the U.S. economy and jobs market. And in fact, small corporates currently account for more than half of all new private sector jobs created in America. Last month's reading came in below expectations, yet at a historically elevated level. the NFIB report stated that small business optimism ended the year historically strong, with a reading of 102.7, down 2 points from November. Seven of the ten components fell. Two Improved and one was unchanged. Crucially, a greater number of small business owners reported better business conditions and expect higher nominal sales in the next three months. And even though frequency of plans to raise compensation fell 2 points, it remains one of the highest readings in the survey's 46 year history. Small businesses continue to hire and create new jobs with actual job creation, matching November's reading, the highest since May. One drag from last month's survey was the lower additional headcount that small businesses intended to add. That additional headcount question is a key component of the monthly survey. But just as important are the increases to capital expenditures and the outlook on sales and earnings. So it's a pretty comprehensive view of the environment for small businesses in the economy. But the main question is will small businesses carry the economy? Bottom line, this month, we're expecting 103.5 for the NFIB Small Business Optimism Index. Should that number come in strong, money might start to flow back into the small cap stocks that have lagged the S&P so far this year. If we look at this chart of the iShares S&P Small Caps 600 - also known as the IJR - and compare it to the S&P 500 - you can see that the IJR has lagged behind around 4% since the start of January. 

    The jobs number came out very strong. Non-Farm Payrolls came in at 225,000 - much higher than the 165,000 that was expected. However, there was no real pressure on wages to the upside, as month on month, the wage increase came in at 0.2%, slightly below the 0.3% estimate. Stocks were already in sell mode, so there was no real reaction, but the 10 year yields sank 0.03% to trade under 1.6%. 

    So there it is, the New Hampshire Primary and the NFIB Small Business Optimism Index in the Before. And U.S. jobs numbers in the After. 

    Refinitiv data throughout. This has been the Tuesday episode of Before and After. Please subscribe and hit the notification bell, to ensure that you're alerted to all of Refinitiv's future market updates. 

    We'll see you on Friday!

Episode 14 - Part 2

Bond yields and US industrial production – What’s the story?

Published on: February 14th, 2020 • Duration: 6 minutes

In this episode, we discuss how most bond yields still live in negative territory and how closely the world is looking to the U.S. 10-year yield for indications of an economic meltdown. However, we then explain why the German 10-year bund yield is also a leading indicator for rates globally, a data point that investors should pay close attention to. Then we move on to talk about how US industrial production is expected to be dragged down by manufacturing, particularly steel. Finally, we review the new reports of the NFIB Small Business Optimum Index.

Woman stands in empty studio. On the back wall are two fluctuating line graphs
05:36
  • This is Before and After from Refinitiv. I'm your host, Johanna Botta. 

    In today's Before section, we'll be looking at Bonds and the U.S. Industrial Production Numbers. And in the After section, we'll be reporting on the NFIB Small Business Optimism figures. 

    It seems as though the financial world is fixated on the U.S. 10 year yield, which has been hovering above 1.5% after an unsuccessful run at 2% in late 2019. And a massive jobs report in the U.S. last Friday did nothing to prevent investor demand for bonds. Of course, Coronavirus has created some panic to own stocks and bonds. But what we're really seeing is a word of de minimus yields getting more entrenched. Across the world government bonds remain deep into negative yield territory. So this might be a good moment to try and understand where we will see bond yields first start to rise once more. Just look at these two year European sovereign debt yields. All of them hovering near minus 0.5 BPS with no end in sight. Or is there? Is the Fed, for all intents and purposes, on hold for 2020? Or will a central bank be pumping in liquidity and therefore perpetuating the mass assumption of economic meltdown? At the end of January all the negative yielding bonds in the world equated to 14 trillion dollars, and some are anticipating that U.S. treasuries could one day join that growing club. So which market is pricing fear correctly? Is it equities that seem to have shrugged off Coronavirus, at least in the U.S. they have. Or is it bonds where yields remain subdued? Perhaps the answer lies with the German 10 year bund yield. Since its lows of minus 70 BP last Summer. The bund rallied hard to just minus 20 BPS, and until the Coronavirus started to spread in January, it looked as if yields back in positive territory were not out of the question. But now we are at minus 40 BPS smack in the middle. Will it be new lows on bund yields or positive yields to come first? And it's not just Germany's role as the leading economy for the Eurozone that makes a bund, a leading indicator for rates everywhere. It's also because the German manufacturing sector has become so sensitive to the slowdown in China. And so if the bund steadies, despite all this weakness in macro fundamentals, it could mean that higher yields are around the corner. The big question would be what level of yields will destabilize markets? In 2018 It was the US ten year yield reaching 3.25% Today tt will probably be lower. 

    Of all the current assumptions about the U.S. economy, it is the Industrial Production number that remains an enigma. We know that the jobs market is firm, and that services as well as small businesses are driving the U.S. economy right now. 

    Industrial production measures the output of businesses that form part of the economy's industrial sector. Manufacturing is the most important sector since it accounts for 78% of total production. Last month, we saw a month over month decline of 0.3%, which was greater than expected. Now the forecast is set for industrial production to be anemic, and that it will be dragged down by manufacturing. You can see this has already been priced into the S&P Steel Sector, which is the worst performing category across the S&P 500 so far this year. And if you dig a little deeper, it's clear that the S&P Steel Sector is just one stock - Nucor. Nucor is currently trading around $48 a share, and that's dangerously close to the $46 level it has been bouncing off over the past couple of years. So we'll soon see if a better than expected industrial production number ends up tempting some investors that are looking for a sector rotation rebound. 

    The NFIB number came in stronger than expected at 104.3 versus 103.5. That meant small business owners were upbeat about the economy for the third time the last four months. Some highlights from the report include the sales expectations rising to the highest level since May 2019. And 26% of small business owners in the survey said their top issue was trying to find qualified workers. A clear consequence of the tight labor market. According to the report, a historically high percentage of business owners intend to increase wages to fill open positions. So we'll have to wait and see if this is an early spark of inflation. And just as we anticipated, IJR took the strong number and went off to the races, surging 1.5% in the morning session before finishing up 0.75% for the day compared to the S&P, which was only up 0.17%. Let's keep our eyes on that spread to see if IJR are playing catch up. 

    So there it is. Bonds and U.S. Industrial Production in the Before and NFIB small business optimism numbers in the After. Refinitiv data throughout. This has been the Friday episode of Before and After. Please subscribe and hit the notification bill to ensure that you're alerted to all of Refinitiv's future market updates. 

    Have a great weekend and we'll see you on Tuesday.