RECORD GROWTH AND TREASURY YIELDS

Did record third quarter growth impact yesterday’s seven-year Treasury auction?  In my view the lack luster demand, defined by the weakest demand for bonds by a two standard deviation margin, was significant.  Was the unexpected weak demand the result of the data or the result of the massive need for funds, a need amplified by the most dovish Fed in history that will permit above average inflation for a period of time, neither parameter is yet to be defined.

Treasuries trade upon future inflationary expectations and expected demand for funds.

Commenting about third quarter GDP, the economy bounced back by a record 33.1%, slightly beating consensus.  All aspects of the report exceeded expectations.  The question at hand is the growth sustainable.

To date it appears that it is, defined as growing around a 5% pace.  However, the rate of growth will be dependent upon potential COVID shutdowns.  The election will have an impact but that impact will not be known or felt in the immediacy.

As noted many times, Biden has endorsed a major rewriting of socio economic and Constitutional norms, the result of the progressive arm of the Democratic party.  During the past 24 hours many of its progressive leaders are already declaring that if Biden wins, their demands must be met.

Will such demonstrative statements influence middle of the road voters who may not share the progressive zeal but also abhors the President’s mannerisms?

Enthusiasm is a force multiplier.  Which candidate’s supporters are more enthusiastic?

Commenting on yesterday’s market action, equities reversed about 2/3 of the previous day’s drop.  Late in the afternoon, Bank America opined if there is a contested election, the averages can slide as much as 20%.  The Bank further writes that “if either side refuses to accept the results, with the economy set for an uncertainty shock, with businesses delaying hiring and investments, the decline could be considerably more.”

After the close the four largest companies posted results.  Apple, the largest company in the world, and Amazon, the third largest, disappointed.  Facebook’s results were mixed and Google exceeded.  As evidenced by valuations, expectations were very lofty.  A fifth company, albeit not in the same league as the “Fab Four,” Twitter also disappointed and is down considerably this morning.

Last night the foreign markets were mixed.  London was up 0.05%, Paris up 0.60% and Frankfurt up 0.01%.  China was down 1.47%,  Japan down 1.52% and Hang Sang down 1.95%.

The Dow should open moderately lower on earnings, COVID and the election.  More analysts are now acknowledging the potential radical rewrite of the macro economic landscape and the societal impact if the Constitution is changed if Biden elected and if there is a Blue Wave, suggesting great uncertainty via greater taxes and regulations.  The 10-year is off 1/32 to  yield 0.83%.

 

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