Episode 14: New Hampshire primary and bond yields

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!