The Week Ahead: Liquidity! Liquidity! They’ve all got Liquidity!

Voted the funniest film one-liner (granted, over a decade ago…but what have we had since?), today’s title comes from a 1960s classic uttered by the incomparable actor, Kenneth Williams who played Julius Caesar. It’s probably pushing it to say the power struggle in ancient Rome resembles the ongoing issues in the US Congress about the new Phase IV stimulus package. But for sure owing to abundant liquidity, markets are in a ‘buy everything’ mood hunting for yield. Perhaps the stab wounds inflicted on Caesar reflect the very deep concerns of bond investors currently.

US Treasury yields have been closing at record lows this week with the 10-year note falling ever closer to 0.5 per cent. The extreme worry of many investors is resulting in a relentless bid for government debt in the face of enduring fears around a second wave of virus infections on top of delays to the new round of fiscal stimulus. A stalling recovery is now being seen in employment indicators such as the weekly US initial jobless claims which have risen for two straight weeks and hit a five-week high last week. More recently, Monday’s ISM Manufacturing employment component remained below the key break-even 50 level. This tell us that jobs are still being lost, even though at a slower rate than the previous month.

In stark contrast to the angst of bond investors, US stock markets are closing in on their all-time highs, a remarkable feat when reflecting on the past six months, and even the next six. Low yields in bonds are obviously not good for market participants in search of returns, so inevitably they are biddingup riskier assets. Meanwhile, headlines continue to ratchet up US-Sino tensions while a string of poor earnings illustrates the ongoing hit from the pandemic. As the fiscal cliff gets near and the virus spread into sunbelt states begins to affect economic activity, it only seems to be the fixed income market which is hunkering down and taking any note of a world slipping into a possible pandemic-fuelled recession.  

Of course, that means the Federal Reserve’s ‘low for longer’ rate policy is set to keep on going and with it, the liquidity taps will remain open for the foreseeable future. One consequence of this loose monetary policy, ongoing QE and debasement of fiat currencies has been a rush to gold as traders propel the yellow metal to record highs. How long does this disconnect between rampant stock markets and the relentless rally in bond markets (and with it, lower yields) continue? 

Hopes of the next fiscal package agreed on by Congress will for sure be crucial in any improvement in risk sentiment. Recent comments by Treasury Secretary Mnuchin hoping for a deal by the end of this week are promising, while a flatter infection rate would probably allow bond markets to digest weak economic data better. 

Friday’s monthly jobs report will be key in this respect. It is interesting that the so-called ‘whisper’ number of one million job gains is below the more official consensus forecast of 1.5 million. Importantly, this still leaves over 14 million jobs missing since March but there seems little doubt the plentiful liquidity situation will keep stocks markets afloat going forward.