[MORNING CALL:] Trump 2.0

“The more things change, the more they stay the same.” While we may have had a changing of the guard in the nation’s capital, an apparent unprecedented rally in the stock market, a new record high for crypto, a reversal of fortune for the dollar, and a meteoric rise in Treasury yields, with no new issues announced overnight, the US high-grade primary market remains dormant. And given uncertainty surrounding the new regime, it’s expected to stay that way at least until after the Veteran’s Day holiday on Monday. This after the new issue market registered its nineteenth “zero” ex-SSA issuance day of the year -there were 32 last year. That left issuance for the week, a week that the Street had expected no more than a rather anemic $4bln to cross the tape - the lowest guess came in at $2bln, while the most optimistic of our poll respondents thinks there's a possibility of as much as $7.5bln pricing this week - at a mere $700m.

As you all know by now, former President Donald Trump is once again the President elect of the country after defeating Vice President Kamala Harris for the nation’s highest office. Republicans are also expected to regain their majority control of the Senate, while the House was still up for grabs, leaving open the possibility of a Republican sweep.

Investment bets on a Trump victory are paying off this morning. Futures tied to the Dow are indicating a better than 1,200-point gain at the open - the last time the Dow rose more than 1,350 points in a single session was two years ago - while the S&P500 (+2.25%) and the Nasdaq (+1.66%) also rallied significantly on the election results. The overnight rally was fueled by a 13% rise in the share price of Tesla; a 7% to 10% rise in shares of JPMorgan, Bank of America and Wells Fargo who stand to benefit from higher interest rates and the possibility of less regulation. And they certainly are higher this morning as investors migrate from the safe haven of the Treasury market into riskier assets on the speculation that Trump’s proposed tax cuts and other spending plans will spark economic growth.

Neither Trump nor Harris really promised fiscal discipline on the campaign trail, raising worries that investors will demand higher yields in exchange for holding Treasuries as the government is forced to issue more and more debt to fund its ballooning spending. The benchmark 10yr note, which went out yielding 4.26% last night, ballooned 18bp overnight to 4.44%, its highest level since the first of July, while the long bond yield rose 20bp to 4.64% and the 2yr, the most susceptible to the vagaries of underlying fiscal policy, saw its yield jump 7bp to 4.26% on the premise that those same fiscal policies could lead a widening of the fiscal deficit and reignite inflation, something the Fed has been fighting tooth and nail to bring under control.

Corporate spreads, by the way, tightened 2bp overnight to where the average high grade bond is trading 84bp over comparable Treasuries, i1bp away from its tightest level of the year.

Speaking of the Fed, it will be interesting to see just how the Fed reacts to the shift in power and the markets in general. It is (or was) widely expected that the Fed will (or would) cut interest rates by 25bp at the conclusion of its two-day policy meeting tomorrow. However, the Fed’s future actions will become more unsettled once the new president and Congress take office in January. According to some economists, Trump’s proposals to impose high tariffs on all imports and launch mass deportations of unauthorized immigrants and his threat to intrude on the Fed’s normally independent rate decisions could send inflation surging, which could compel the Fed to ease up or even stop cutting rates. Right now, traders in the Fed Funds futures market are still 97.5% sure the Fed will cut rates by 25bp tomorrow. However, the odds of another 25bp cut in December fell to 68.6% from 77.3% just yesterday.

As we said, “The more things change, the more they stay the same.” The results of the election did not alter the landscape overnight. The same concerns – inflation, immigration, taxes, regulation, geopolitics – still exist. We’ll just be dealing with them from the other side of the aisle.

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