President elect Trump and Elon Musk has thrown Congress into disarray as both publicly stated they will not support the Continuing Resolution (CR), threatening a government shutdown by this weekend.
This begets a larger question, the effectiveness of DOGE. Today’s CR battle can be viewed as the proverbial “shot over the bow” or a very minor skirmish based upon the stated intents of DOGE.
About a week ago House Speaker Mike Johnson said House Republicans “want to be willing partners” in assisting the Department of Government Efficiency after Elon Musk said the DOGE intends to cut 75 percent of all federal agencies. Speaker Johnson said “We certainly hope” to cut the number of federal agencies from 428 to 99, as Musk has vowed.
Most will agree, including the father of Modern Monetary Theory [A government can borrow and spend with impunity if the government borrows in its own currency], federal spending is at unsustainable levels and it is not a question as to if but as to when a fiscal crisis will occur that decimates the currency and debt markets if no action is taken.
The Treasury market has been crushed in recent days, with most pointing to the Federal Reserve’s “hawkish put” as the primary catalyst. As noted yesterday, the 10-year Treasury sold off by the most following the conclusion of a Fed meeting since 2013 when the Committee then announced the ending of QE.
However, this is not completely accurate. The recently concluded auction of the 30-year Treasury was regarded as “extremely weak as no one wants to own longer duration debt.,” primarily the result of massive Treasury issuances in the coming months and from the acknowledgment that the “shorter bucket of maturities” is already exceeding their recommended levels by a considerable margin.
A Bloomberg headline read yesterday “US Yield Curve is the steepest since 2022,” the result of Fed’s hawkishness and the disagreement over the “neutral rate,” supply angst, stubborn inflation, strong growth, and “potential policies advocated by the incoming Administration.”
Will the bond vigilantes resurface in force? About thirty years ago Clinton strategist James Carville made the following comment when the Clinton Administration was attempting to pass a very progressive agenda;
I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.
Commenting on yesterday’s equity markets, stocks were essentially flat in a “defensive session,” with questions concerning the lack of breadth, Treasury yields at their highest levels since May and the rethinking of monetary policy assumptions.
The dollar has been very strong. Will this become an issue for trade, as issue that will be perhaps blamed on potential tariffs?
What will happen today?
Last night the foreign markets were down. London was down 1.03%, Paris down 1.28%, and Frankfurt down 1.53%. China was down 0.06%, Japan down 0.29%, and Hang Seng down 0.16%.
Dow and NASDAQ futures are down 0.5% and 1.75%, respectively on monetary policy angst. Concerns are also rising about the implications of the House rejecting a temporary funding bill that would avert a partial government shutdown.
The S & P 500 is headed for its worst weekly drop since at least September. Later today the monthly PCE data is released, the Federal Reserve’s preferred measure of inflation. The 10-year is up 5/32 to yield 4.54%.
