Bond Vigilantes Butting Heads With Washington’s Profligate Crowd

(…) While stronger economic data helped boost bond yields throughout most of Q3 and Q4, there’s now more “bad” reasons for the rise in yields. As a result, bond yields have risen since the Fed started to ease in September even though the Citigroup Economic Surprise Index has been falling (chart).

GDP. Q3 real GDP was revised up from 2.8% to 3.1%, led by an increase in personal consumption expenditures from 3.5% to 3.7% (chart). Investment in equipment and intellectual property were both revised higher as well, a good sign for future productivity growth.

Real final sales to domestic purchasers, what Fed Chair Jerome Powell likes to refer to as core GDP, was revised from 3.2% to 3.4% in Q3. Real disposable personal income growth was also revised up from 0.8% to 1.1%. (…)

Jay Powell Wednesday repeated 7 times: “At 4.3 percent and change we believe policy is still meaningfully restrictive.”

Thursday:

• Real GDP growth: revised up 0.3pp to +3.1%
• Personal consumption growth: revised up 0.2pp to +3.7%
• Residential investment growth: revised up 0.7pp to -4.3%
• Government spending growth: revised up 0.1pp to +5.1%
• Business fixed investment growth: revised up by 0.2pp to +4.0
• investment growth in intellectual property: revised up 0.6pp to +3.1%
• equipment investment growth: revised up 0.2pp to +10.8%
• Contribution from net exports: revised up 0.2pp to -0.4pp
• export growth: revised up 2.1pp.
• Real domestic final sales growth: revised up 0.2pp to +3.7%.

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Ed Yardeni devised a simple way to judge whether the Fed is restrictive or not. Recessions tend to coincide with periods when the FFR exceeds nominal GDP growth. The spread is currently close to zero, suggesting that the FFR isn’t too restrictive.

Neither are the bond vigilantes, yet:

US Existing-Home Sales Rise as Buyers Accept High Mortgage Rates Contract closings rose to 4.15 million pace, most since March

(…) November’s improvement aside, the market for previously owned homes has been stagnant with annual sales hovering around 4 million homes for the past two years, a ho-hum level that’s just three-quarters the pre-pandemic trend. That’s been due in part to a historic shortage of homes for sale as owners refuse to list their properties and give up their existing 3% mortgage rates, which in turn has driven up prices. (…)

Affordability remains a major hangup. The median sale price of a previously owned home increased 4.7% from a year earlier to $406,100 last month, a record for the month of November. And while the Federal Reserve has lowered its benchmark interest rate by a full percentage point since September, mortgage rates remain twice their level from year-end 2021 and are expected to stay above 6% for at least another two years, according to the Mortgage Bankers Association.

Home financing costs for a 30-year fixed-rate contract were 6.75% in the week ended Dec. 13, per MBA data. Treasury yields — which influence mortgage rates — spiked Wednesday after the Fed’s final meeting of 2024, in which central bankers forecast fewer rate cuts next year. (…)

  

FHFA and Wells Fargo Economics

Trump Threatens Tariffs If EU Doesn’t Buy More US Oil and Gas President-elect says the bloc must make up for trade deficit

(…) “I told the European Union that they must make up their tremendous deficit with the United States by the large scale purchase of our oil and gas. Otherwise, it is TARIFFS all the way!!!,” he said on Truth Social.

The US is the world’s largest producer of crude oil and the biggest exporter of liquefied natural gas. LNG buyers — including the EU and Vietnam — have already talked about purchasing more fuel from the US, in part to deter the threat of tariffs. (…)

“We are well-prepared for the possibility that things will become different with a new US administration,” German Foreign Minister Annalena Baerbock said after a Group of Seven meeting in Italy in late November. “If the new US administration pursues an ‘America first’ policy in the sectors of climate or trade, then our response will be ‘Europe united.’” (…)

LNG “is one of the topics that we touched upon,” von der Leyen said after a phone call with Trump. “We still get a whole lot of LNG via Russia, from Russia. And why not replace it with American LNG, which is cheaper, and brings down our energy prices.”

The US is already Europe’s biggest provider of LNG, but imports from Russia remain solidly in the second spot. EU officials are looking for ways to curb Moscow’s role as the war in Ukraine continues, even while Russian pipeline gas and LNG are largely outside of the scope of sanctions. The bloc will explore potential measures when they discuss a new sanctions package next month but stringent restrictions remain difficult, according to a person familiar with the matter, who spoke on the condition of anonymity.

In the short-term, the US doesn’t have much more capacity to increase shipments. And since LNG is sold through long-term contracts, adding shipments to Europe would require original buyers of the gas to agree to divert its shipments to Europe — but that wouldn’t boost the amount being exported by the US. Over the longer term, more capacity will come on line with dozens of projects in the US currently in the works. (…)

But the EU has still prepared for the possibility that it will end up in a trade war with Washington. The EU’s new anti-coercion instrument strengthens trade defenses and enables the commission, the bloc’s executive arm, to impose tariffs or other punitive measures in response to such politically motivated restrictions.

The EU also adopted a so-called foreign subsidies regulation, which allows the commission to prevent foreign companies that receive unfair state handouts from participating in public tenders or merger-and-acquisition deals in the bloc, among other measures. (…)

One potential problem is that U.S. domestic demand for natural gas is rising rapidly to fuel the AI boom. LNG exports may soon need to be curbed.

China’s Housing Rescue Falls Short in City That Signaled the Crisis The limits of government intervention are evident in Zhengzhou, where home prices keep falling.

Zhengzhou, where Foxconn Technology Group runs the world’s biggest iPhone factory, was among the first in the nation to see its housing market crash. Since 2022, the local government has adopted an array of measures to revive the market, from loans to developers to complete unfinished projects, offers to buy their surplus units and turn them into affordable housing, and even payments to residents who replace outdated homes.

Zhengzhou has tried so many ideas that officials from other cities have been flocking there to study its model. And yet home prices in Zhengzhou and the rest of China keep falling.

A recent visit by Bloomberg Businessweek to the city revealed evidence of the state intervention—cranes whirring again along the skyline thanks to government loans for long-stalled developments and people collecting keys to move into an affordable housing project—but would-be buyers remained on the sidelines, convinced that prices had far from bottomed out.

The public housing push, Zhengzhou’s boldest effort, isn’t making a dent in the oversupply of homes, because it’s too difficult for the local government to persuade developers to sell apartment complexes at enough of a discount to make the economics work.

The biggest problem in Zhengzhou and across the nation is that families, which have in recent years relied on real estate for almost 80% of their wealth, are hoarding cash. Without stability in the property market, the country is at risk of a prolonged economic stagnation similar to Japan’s “lost decade” in the 1990s.

Even with government intervention, there may be several more years of housing pain: China’s population is shrinking, consumers are worried about unemployment, and there are just too many homes.

Real estate will be a drag on growth for the world’s second-largest economy for at least five more years, predicts George Magnus, research associate at the University of Oxford China Centre and author of Red Flags: Why Xi’s China Is in Jeopardy. “We have definitely passed peak property in China,” he says, predicting once the market settles, home prices will be permanently lower. “The government cannot do anything to prevent this and can only try to smooth the transition or make it less uncomfortable.” (…)

After a brief recovery in October, residential sales fell again in November. National used-home prices have declined for 39 straight months through October, to a level about 30% below the July 2021 peak; Zhengzhou’s market has followed a similar trend. Fitch Ratings Inc. expects a 5% decline in new-home prices in 2025. (…)

The country’s glut of unsold new homes runs into the tens of millions, and a vast number of units that were presold but never built exacerbates the problem. Landing on definitive estimates for either is impossible because of the methodology used by the official statistics bureau. Bloomberg Economics estimates that the surplus of unsold homes would take over five years to sell, while Bloomberg Intelligence says it would cost 11 trillion yuan to complete the presold units. (…)

For local state-owned companies to be incentivized to scale up their purchases of inventory, analysts at Goldman Sachs Group Inc. have estimated that a discount of 30% may be needed, while Huatai Securities Co. analysts have suggested that markdowns of more than 50% may be required.

State purchasing of unsold units for public housing projects isn’t a quick fix for China’s housing problems, says Kristy Hung, an analyst at Bloomberg Intelligence. There’s a “perfect storm” of structural issues facing the market: demographic challenges, developers’ persistent liquidity crunch, unfinished homes weighing on buyers’ confidence and families stuck in a mindset that home prices won’t rise, she says: “These, together with a grim outlook on the economy and employment, on top of limited room for further policy support, lead us to believe that China’s housing market could be in for multiyear corrections.” (…)

• China’s Struggling Rich Cities Are Threatening the Entire Economy Fiscal hardship gripping poorer provinces is spilling into wealthy regions long considered slowdown-proof.

(…) The fiscal austerity that’s gripped poorer parts of China since the pandemic is now spilling into provinces that long seemed slowdown-proof, threatening the Communist Party’s ability to propel its $18 trillion economy. Preserving that earning power was given fresh urgency by the election victory of Donald Trump, who has pledged to choke off critical Chinese exports. (…)

In a worrying sign, the southern powerhouse of Guangdong in the first nine months of the year clocked its weakest expansion since the pandemic. The housing crash that’s made developers reluctant to purchase land choked off a key source of income, just as local governments collected less tax from struggling companies. A debt pile-up also made interest payments a growing burden. (…)

Foreign trade in Suzhou accounts for 6% of China’s total and nearly half of Jiangsu’s overall volumes. About 18,000 foreign companies operate there, with a combined investment of over $160 billion — the third largest in China. “Many families in Suzhou will be affected because very often both the husband and wife are employed by foreign companies,” Jiang said. “Their pullout from the city means job cuts here.”

What makes it an especially precarious moment for even well-off cities like Suzhou is that the local government is running a tight fiscal ship.

Authorities have scaled back salary and benefit payments for employees and reduced investment. Two years after reopening from Covid lockdowns, the Suzhou city government’s budget for meetings, service outsourcing, government car operations and maintenance is still at least 10% below its pre-pandemic levels.

Falling land sales are driving down Suzhou’s investment. Spending under a main budget for infrastructure is expected to decline 17% this year, after a 10% drop in 2023, according to Bloomberg calculations based on its budget numbers. (…)

While dwindling funding is hampering new investment, it’s by no means the only issue holding officials back from pursuing growth. The government’s anti-corruption campaign, for one, is making some local authorities inclined to do less to avoid making mistakes.

Audits and endless investigations into suspected graft are eroding officials’ desire to innovate at the local level, according to a senior partner at a law firm in Beijing who specializes in infrastructure financing and represents builders seeking delayed government payments.

Even though the 10-trillion-yuan debt swap plan sparked hope of unblocking some stalled payouts, the lawyer warns it so far remains wishful thinking, expressing doubt local officials who are “lying flat” can maximize the benefits of the program. (…)

• China Shorter Yields Sink to Two-Decade Low as Bond Fever Builds One-year yield slides to 0.85%, a level unseen since 2003

Bank of Russia Holds Key Rate at 21% Even as Inflation Rises

(…) Russia’s annual inflation accelerated again in November to 8.9% from 8.5% in the previous month, even after the central bank increased the key rate in October. Inflation expectations, a closely watched metric for monetary policymakers, reached 13.9% in December, the highest level in a year.

The central bank began the year signaling it would consider monetary easing in the second half. Instead, it has sharply raised the benchmark from 16% since July as its bet on a slowdown in price growth failed to materialize. The central bank sees inflation returning to its target in 2026.

Massive budget spending on the war in Ukraine and social programs have kept the economy overheated, while acute labor shortages have led to stiff competition for workers that’s driving up wages. Production, meanwhile, hasn’t been able to expand quickly enough to keep pace with rapidly increasing demand.

The central bank’s plan to cool demand by making credit prohibitively expensive has so far acted as a brake on economic growth, but not on rising prices.

Annual price growth as of Dec. 16 reached 9.52% while food inflation accelerated to 10.93%, weekly data published by the Economy Ministry showed. Vegetables were 24% more expensive than in the previous year.

The central bank said a “cooling of credit activity has already encompassed all segments of the credit market,” and warned that would continue into next year amid the tight monetary conditions. Nonetheless, the bank said that the balance of inflation risks in the medium-term “is still tilted to the upside.” (…)

As the War Boom Ends, the Kremlin Faces Growing Economic Risks

(…) Russia’s total military spending will be somewhere between 7 per cent and 8 per cent of gross domestic product (GDP), simi­lar to the 2024 level, which was a record in Russian post-Soviet history. In 2021, the year before Russia’s full-scale invasion of Ukraine, military spending was just 3.6 per cent of GDP. How much of Russian budg­etary expenditures do, in fact, go towards the war is very difficult to assess. Spending not directly related to the military, such as healthcare and construction in the illegally annexed Ukrainian territories, inflates the overall bill. (…)

Since 2023, energy revenues have declined amid falling prices on global commodity markets and with sanctions cutting into Russian export revenues. As a result, Russia has recently been running budget deficits, but at around 2 per cent of GDP, they do not threaten economic stability. Fiscal short­falls of this magnitude can be covered by the National Welfare Fund and domestic borrowing for several years.

Starting in 2025, some taxes will be hiked so that the budget can return to structural balance, despite increased military spend­ing: high-income earners will face higher income taxes and corporations higher profit taxes. Revenues will also be raised through much higher fees on imports of cars and lorries. At the same time, social expenditures are declining, not because of cuts in welfare but because the number of pension­ers is falling – the official retirement age is gradually being raised and Russia suf­fered a very high Covid death toll, especially among the elderly. However, it is doubt­ful whether Russia’s budget deficit will, in fact, shrink according to plan: since 2022, spending has been significantly higher than planned each year. (…)

Throughout 2024, Russian weapons production has increased more slowly than during the previous two years. The main reason is probably the lack of specialized personnel. Also, the construction of new factories takes time and that process has been at least slowed down by Western sanc­tions, as specialized machinery can no longer be imported so readily.

Despite the increase in arms production, Russia continues to struggle to make up for the material losses it suffers at the front. Moscow has to rely on imports from coun­tries such as Iran or North Korea. In the case of some weapons systems, the industry is able to deliver in large quantities only because it is tapping into the stocks of vehicles that were built up during the Soviet era. Only about 20 per cent of new armoured vehicles are built from scratch. This means that much of the cost of Russia’s current war against Ukraine today has, in fact, been met by the state expenditures of the Soviet Union.

Meanwhile, the recruitment of soldiers has slowed somewhat, too, according to official figures, and has become much more expensive. According to the Russian Defence Ministry, 540,000 recruits were added in 2023, while Dmitry Medvedev, the deputy chairman of Russia’s Security Council, announced that another 190,000 signed up during the period January-July 2024. It is very difficult to verify these figures, but they are generally supported by indicators such as Russian budget spending on recruit­ment. (…)

So far, the Krem­lin has been able to find enough recruits to replace – at least quantitatively – those lost at the front. (…)

The enormous war expenditures have led to a sharp increase in aggregate demand. Russian Finance Minister Anton Siluanov estimates that the fiscal impulse for the period 2022–24 totalled 10 per cent of Russia’s annual GDP. The result has been high GDP growth rates: in 2023, the Russian economy grew 3.6 per cent, largely owing to the creation of 2 million new jobs, most of which were in the defence industry and the army.

However, this growth model has reached its limits. Unemployment is at a historical low of 2.3 per cent and there is an acute labour shortage. The Russian Central Bank still expects the economy to grow around 3.5–4 per cent this year; but most of that growth will be due to the statistical base effect (meaning that last year’s dynamics are reflected, not the current situation). In fact, the Russian economy has barely grown since early 2024. And in September of this year, leading indicators such as the S&P Purchasing Managers’ Index were already signalling a contraction in Russian manu­facturing – for the first time since 2022.

Russia’s labour shortage is exacerbated by demographic trends. Each year, the population in the 20-65 age group shrinks by about 1 million people. The impact of this development on the labour markets can be only partly offset by the gradual increase of the retirement age. In addition, labour migration to Russia has fallen to its lowest level in 10 years owing to an increas­ingly hostile environment, harassment and even occupational bans for migrants in Russia, among other reasons. (…)

In 2024 alone, the average wage grew by 19 per cent over the previous year. In the Russian military-industrial complex, the pay hikes have been even bigger. For example, Russia’s largest tank manufacturer, Uralvagonzavod, increased wages by 12 per cent in May 2024 and then again by 28 per cent in August.

The higher wages have led to optimism about the economy among the Russian population. Consumer spending is on the rise. But prices are rising, too: in October 2024, seasonally adjusted core inflation was 9.7 per cent annualized. Western sanctions are partly responsible for inflation, as they make imports more expensive by complicating international logistics and payments for Russian businesses. At the same time, Russian export revenues from oil, coal and other commodities have decreased under the sanctions; as a result, the ruble has weakened, which means higher import prices. (…)

Short-term interest rates are at their highest level in 25 years. This creates stronger head­winds for the Russian economy because companies’ interest costs rise and demand fall. The construction sector has been par­ticularly hard hit: mortgage rates have risen to more than 30 per cent. At the same time, government subsidies for mortgages were cut in the summer. (…)

While the economic difficulties are likely to dampen optimism among the population and force the government to make political trade-offs, Russia’s ability to fight the war in Ukraine will not be directly affected. More important in this respect is the success of recruitment campaigns and the capacity of the Russian military-industrial complex. The future of Russian arms production hinges on the remaining stocks of Soviet-era armoured vehicles. Depending on the weapons system, these stocks have shrunk considerably; and in some cases, maintaining production volumes could become more difficult as soon as in 2025. To con­tinue fighting Ukraine at the same level of intensity, Russia would have to significantly increase the capacity of its arms industry.

The extent to which the economic slowdown becomes a problem for Russia also depends on the price of oil next year. A sus­tained decline in export revenues would lead to a rapid deterioration in the economic outlook. The Central Bank would be unable to intervene effectively because most of its reserves are frozen under Western sanc­tions. The devaluation of the ruble, high inflation and recession would all be inevi­table. (…)

More Men Are Addicted to the ‘Crack Cocaine’ of the Stock Market Gamblers Anonymous meetings are filling up with people hooked on trading and betting. Apps make it as easy as ordering takeout.

At Gamblers Anonymous in the Murray Hill neighborhood of Manhattan, one man called options “the crack cocaine” of the stock market. Another said he faced hundreds of thousands of dollars in trading losses after borrowing from a loan shark to double down on stocks.  And one young man brought his mom and girlfriend to celebrate one year since his last bet.

They were among a group of about 60 people, almost all men, who sat in rows of metal folding chairs in a crowded church basement that evening. Some shared their struggle with addiction—not on sports apps or at Las Vegas casinos—but using brokerage apps like Robinhood. (…)

In an age where sports betting has become an accepted pastime—accessible by the flick of the thumb on an iPhone app—they found the same rush betting on dogecoin, Tesla or Nvidia as wagering on Patrick Mahomes to carry the Kansas City Chiefs to the Super Bowl. 

Doctors and counselors say they are seeing more cases of compulsive gambling in financial markets, or an uncontrollable urge to bet. They expect the problem to worsen. (…)

Wall Street keeps introducing newer and riskier ways to play the market through stock options or complex exchange-traded products that use borrowed money and compound the risk for investors. (…)

Activity in options is on track to smash another record this year.  Trading in contracts expiring the same day, which are the riskiest, has soared to make up more than half of all trades in the market for S&P 500 index options this year, according to figures from SpotGamma. These trades are more electric than traditional stocks, with the potential to rocket higher or plunge to zero within minutes. (…)

Unfortunately, there is only one proven large scale remedy: a bear market.

Fed Signals Plan to Slow Rate Cuts, Sending Stocks Lower Having reduced rates by a full percentage point since September, officials penciled in just two cuts next year

(…) “Today was a closer call, but we decided it was the right call,” Powell said at a news conference after the meeting. He later added, “From here, it’s a new phase, and we’re going to be cautious about further cuts.” (…)

New projections released Wednesday show Fed officials expect inflation to be stickier next year than previously anticipated, possibly because of policy changes by President-elect Donald Trump. The projections show officials expect to make fewer rate reductions, with most penciling in two cuts for 2025, down from four at their meeting in September. (…)

“There is an inconsistency” in cutting rates while anticipating firmer inflation “that is difficult to square,” Michael de Pass, global head of rates trading at Citadel Securities said.

The magnitude of the revision to the inflation forecast was broad-based among the 19 officials who participate in policy meetings and incredible given how little officials changed their forecasts for the labor market and growth, said Omair Sharif, founder of the research firm Inflation Insights.

“This wholesale change in their views are clearly tied to uncertainty and risks around as-yet-enacted tariff and immigration policies and have far less to do with changes to the economic landscape,” he said. (…)

Powell said recent data, and not just potential policy shifts, warranted a change in the inflation forecast. The labor market has also been a little sturdier than officials thought it would be when they started cutting in September. (…)

Powell repeated his view that it was possible but too soon to tell if the current situation would differ from an episode in 2018-19, when Trump launched a trade war with China after imposing tariffs on steel and aluminum more broadly.

Back then, inflation was low, and businesses had little experience pushing cost increases along to customers. The inflation shock of 2021-22 means that the psychology regarding inflation might have changed in ways that make companies and workers more comfortable passing along higher prices and demanding higher wages, respectively. (…)

Powell said officials were ready to slow down cuts because of uncertainty over how restrictive their policy stance would be after having made a full percentage point in cuts. (…)

The one thing that comes out of Mr. Powell’s presser is that the Fed has become worried about inflation. The focus has moved back from the labor market to inflation.

• “inflation is higher this year. It’s also higher in the forecast next year.”
• “I think that the lower—the slower pace of cuts for next year really reflects both the higher inflation readings we’ve had this year and the expectation inflation will be higher.”
• “You saw in the SEP that risks and uncertainty around inflation we see as higher.”
• “Uncertainty around inflation, I pointed out, is actually higher.”
• “our forecast for inflation for this year, I think, are five tenths higher than they were in September.”
• “that might be the single biggest factor, is inflation has once again underperformed relative to expectations.”

And it’s mainly because of potential tariffs:

• “So the overall picture, the story of why inflation should be coming down, is still intact, in particular the labor market. Look at the labor market. It is cooler by so many measures now, modestly cooler than it was in 2019, a year when inflation was well under 2 percent. So it’s not a source of inflationary pressures.”
• “overall you’re not getting inflationary impulses of any significance from the labor market.”
• “What the committee’s doing now is discussing pathways and understanding, again, the ways in which tariff-driven inflation can affect—tariffs can affect inflation in the economy, and how to think about that. So we’ve done a bit of—good bit of work, all of us have, each of us has. And, you know, it puts us in position, when we finally do see what the actual policies are, to be—to make, you know, a more careful, thoughtful assessment of what might be the appropriate policy response.”

The word “uncertainty” came out 12 times during the presser. Powell summed it up like this:

• “It’s not unlike driving on a foggy night or walking into a dark room full of furniture. You just slow down.”

Particularly if you know somebody is about to move the furniture around.

For investors, this is reassuring because, apart from a recession, the main risk is inflation.

• “So the outlook is pretty bright for our economy.”
• “So we and most other forecasters still feel that we’re on track to—you know, to get down to 2 percent. It might take another year or two from here. But I’m confident that that’s the path we’re on. And, you know, our policy will do everything it can to assure that that is the case.”

My yesterday post was interesting coming just before the policy announcement:

• Over the past three months, control-group sales increased an annualized 5.6%, boding well for fourth-quarter GDP.
• The headline S&P Global Flash US PMI Composite Output Index rose from 54.9 in November to 56.6 in December, signaling the fastest expansion of business activity since March 2022.
• Activity levels were expanded at an increased rate in December in response to strengthening demand. New orders rose at the sharpest rate since April 2022.
• New orders for services rose at a rate not witnessed since March 2022
• Average prices charged for goods and services rose only very modestly, increasing at the slowest rate since prices began rising in June 2020.
• The latest easing pushed the rate of inflation further below the pre-pandemic long-run average, with an especially low rate of inflation again evident in the services economy, where charges rose only marginally and at the slowest rate since May 2020.
• Input cost inflation also slowed when measured across both goods and services, dipping to the lowest for ten months.
• lower cost growth in services was in part due to weaker wage growth
• The service sector expansion is helping drive overall growth in the economy to its fastest for nearly three years, consistent with GDP rising at an annualized rate of just over 3% in December.

• Business Inflation Expectations Decreased to 2.0 Percent

Mr. Powell also said: “Longer-term inflation expectations appear to remain well anchored, as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets.”

The very people who actually decide to raise prices are currently not expecting inflation to perk up, are they?

Looking back, by about what percent did you change prices over the last 12 months? Looking ahead, by about what percent do you expect to change prices over the next 12 months?

John Authers today:

(…) Higher yields attract yet more fund flows into the dollar. The Fed’s hawkish tone means that there is no end to that pressure in sight. (…)

That at present is causing particular pain for Brazil, whose stock market is now down more than 30% for the year in dollar terms. The central bank hiked by a full percentage point last week, and has since intervened by auctioning off dollar reserves, yet that hasn’t stopped a serious run on the Brazilian currency and bonds:

Brazil’s problem is rooted, as Points of Return explained earlier this week, in a serious fiscal deficit, and a crisis of confidence in President Luiz Inacio Lula da Silva, who emerged from brain surgery at the weekend to say that the economy’s only problem was that interest rates were too high. The rise in yields since then shows that the market emphatically disagrees, and is alarmed by an apparent lack of grip. (…)

Like Brazil, the US also has a concerning fiscal deficit, a political setup that seems incapable of dealing with it, and an elderly head of state whose judgment is now widely questioned (with a successor lined up to take over who isn’t much younger). Trump followed his advisers Elon Musk and Vivek Ramaswamy in venting opposition to a congressional compromise designed to thwart a government shutdown, heightening the sense of severe political uncertainty. (…)

In today’s WSJ editorial Good Riddance to the 118th Congress:

(…) All of this speaks to the lack of any spending discipline on Capitol Hill even as annual payments on the national debt now exceed the entire Pentagon budget. If the U.S. dollar weren’t the world’s reserve currency, we’d be a banana republic. (…)

Ed Yardeni:

Investors might also have been upset to learn that the circus is still in town in Washington, DC. The continuing resolution (CR) that would extend federal budgets to March 14, 2025 is running into severe headwinds in Congress. Conservative Republicans in both houses, plus President-elect Donald Trump, and DOGE co-heads Elon Musk and Vivek Ramaswamy have come out against the 1,547-page CR, which almost no one has read. Without a CR, the government will shut down on Friday.

We think that the stock market might remain sloppy through January. Some investors might be planning to take their substantial profits early next year rather than now to defer capital gains taxes. There could be a longshoreman’s strike in mid-January because they oppose automation at the ports. Trump publicly declared that he agrees with the dockworkers. Furthermore, on day one of Trump 2.0, a blizzard of executive orders will likely include a bunch imposing tariffs and authorizing deportation of illegal migrants.

We can’t rule out a 10% stock market correction, but we would view that as a buying opportunity rather than as a reason to panic out of the market since we don’t expect a recession or a bear market. We are still targeting 7000 on the S&P 500 by the end of next year.

The S&P 500 is now sitting on its 50-d m.a.. The more solid 100-d and 200-d m.a. are at 5745 and 5535 respectively.

At 5745, the forward P/E would be 21.8 and the Rule of 20 P/E 24.2. At 5535: 21.0 and 23.3 respectively. At today’s preopening of 5890: 22.4 and 24.8 respectively.

Goldman Sachs:

Congressional leaders released a “continuing resolution” Dec. 17 that would extend government spending until March 14, 2025 and provide more than $100bn in disaster and agricultural aid, among other provisions. Republican support for that legislation in the House already looked relatively weak before President-elect Trump’s statement this afternoon opposing the bill as it currently stands.

Trump’s opposition was unrelated to the main components—he stated support for the spending extension, and the disaster and agricultural aid—so it is possible that a revised package could still pass before the Dec. 20 deadline. Alternatively, congressional Republicans could also attempt to pass a “clean” spending extension to avoid a shutdown, though this would push more items like disaster relief onto the early 2025 agenda, which does not appear to be in either party’s interest.

Despite Trump’s insistence, the odds appear to be against a near-term debt limit increase. Although the debt limit suspension expires Jan. 2, 2025, we expect that the Treasury will be able to continue to borrow under the limit until Q3, so there is little urgency in addressing the issue now, and adding a debt limit increase to the spending extension would likely reduce Republican support for the measure.

That said, the unexpected focus on the debt limit highlights the incoming Trump administration’s motivation to address the issue early.

There are two potential paths to do so. First, if Congress extends spending authority to March 2025, Republicans could attempt to add a debt limit increase to the spending bill they pass at that next deadline. However, at that point the practical deadline for the debt limit will still be a few months away and Democrats are unlikely to support a debt limit increase without important policy concessions (e.g., extension of ACA insurance premium subsidies at a cost of $20bn/yr).

Second, Republicans could add a debt limit suspension to an early-2025 budget reconciliation bill focused on funding immigration enforcement. That said, it isn’t yet clear whether Republicans will follow this two-step strategy—passing a reconciliation bill dealing with immigration and a few other issues early in the year, followed by a second reconciliation bill mid-year to extend tax cuts and make bigger fiscal changes—but this looks more likely than a single bill at the moment.

While the latest developments raise the odds of a near-term government shutdown, we don’t think a protracted shutdown is likely (a short, technical shutdown is clearly possible given the limited time left before the deadline). That said, should a shutdown occur we estimate it would reduce GDP growth in the quarter by 0.15pp for each week it lasted, and would boost GDP growth by the same amount in the quarter following government reopening.