Treasurys Halt Rally as Proposal of New Tax Policy Expected Within Weeks

Many of the trading trends that characterized the first three days of the week reversed course today, as all three major stock indices rose to record highs and Treasurys sold off across the curve.  Bank stocks (+1.4%) recorded the largest gains during the session, fueled largely by commentary from President Trump about the timing of his administration’s policy proposals.  In a meeting with airline executives this morning, Trump reinforced his plans to scale back regulations and informed the group that a “phenomenal” tax plan is set to be released in two or three weeks.  Trump is also preparing for a visit from Japanese Prime Minister Shinzo Abe tomorrow, another important trading partner meeting that could move the markets.  Treasury yields/swap rates increased 4-8 bps across the curve, with the 10-year yield rising back above 2.4%.  Gold fell 0.6% from yesterday’s four month high, and the US dollar gained 0.3% against major currencies, except for the Mexican peso which jumped 0.5% after the Mexican central bank increased its benchmark borrowing rate by 50 bps today to 6.25%.      

Another light day of economic releases was highlighted by the Labor Department’s initial jobless claims report this morning, which showed the number of Americans applying for unemployment insurance for the first time at the lowest level since November.  For the week ended February 4th, jobless claims totaled 234,000, below expectations of 249,000 and 12,000 less than the prior week’s figure.  Supporting the argument of a tightening job market, the four-week moving average of claims fell to 244,250, a level last seen in 1973.  In a separate report, wholesale inventories in the month of December rose by 1%, in line with median forecasts.  At first glance the figure points towards a risk of excess inventory which could prompt a slowdown in production and employment, however, wholesale trade sales increased by 2.6% over the same time, more than 2% higher than the previous month’s revised level.  Motor vehicles highlighted wholesale sales in December with a 5.5% MoM rise.

Investors were paying attention to speeches from two Fed officials today, both of which presented a dovish tone to the monetary policy outlook.  St. Louis Federal Reserve Bank President James Bullard (non-voter) indicated that the Fed should be in no rush to raise rates during 2017 given the amount of existing fiscal uncertainty.  Bullard expects that the current low-growth, low-inflation environment “has been many years in the making and is unlikely to turn around quickly.”  He predicted only one hike will be required this year and reasoned that “We don’t have to move. We have a lot of fiscal uncertainty. Why not wait until that is more clearly resolved?”  Speaking later in the day, Chicago Fed President Charles Evans (voter) focused his speech on the attainment of the Fed’s dual mandate, namely 2% inflation, as a priority in tightening monetary policy. “I believe the risks are greater that the public doubts our resolve to bring inflation up to 2% than they question our will to bring it back down if we were to overshoot 2% by a meaningful amount,” Evans stated.  Last week Evans had predicted two rate hikes being warranted in 2017, but noted that he wouldn’t be opposed to three.