So What Now?

Well, one day on from Trump’s deal with Democrats to rush aid to victims of Hurricane Harvey and avoid any 11th hour brinksmanship ahead of a technical U.S. default, markets were nervous.

Although stocks managed to tread water…

Stocks

…bonds and the dollar exhibited palpable angst as uncertainty grows about the future of the Fed and as traders tried to decipher what the President’s overture to Schumer and Pelosi means going forward.

The whole thing has a “ok, what now?” type of feel to it.

This was a disaster of a day for the reflation trade. 10Y yields hit 2.032% at one point, the lowest since November 10 (see inset below), while the dollar languished:

Yields

Between jitters about Hurricane Irma, a sense that another ICBM launch is just around the corner in North Korea, indeterminacy about the future of the Fed exacerbated by last night’s news that Trump is no longer considering Gary Cohn, and this morning’s econ which gave markets the first read on what we can expect in terms of the near-term drag from natural disasters, whatever “hope” yesterday’s debt ceiling deal managed to instill is fading.

As we suggested would happen on Wednesday given the timing of the December Fed meeting in relation to the new fiscal disaster date, markets are pricing out another hike in 2017.

“Odds of a December hike tumbled for second consecutive session, down to 20% from 25% at Wednesday’s close,” Bloomberg wrote earlier, adding that “factors influencing reduced odds of a hike include:”

3-month extension of U.S. debt ceiling to Dec. 8, a week ahead of FOMC meeting that month;

advance of Hurricane Irma with a further two hurricanes, Jose and Katia, following;

lingering North Korea tension;

All of that “points to participants throwing in the towel for the Fed to hike at the December meeting, which contributed to a short squeeze across Treasuries and eurodollars.”