"The whole Trump trade, the reflation trade — the odds are, that's over. What we're seeing is there's no breakout trade of massive, upcoming fiscal stimulus," said Robert Tipp, chief investment strategist and head of global bonds and foreign exchange at PGIM Fixed Income. Instead, he sees Congress getting bogged down, and there's no clear direction of where policy is heading.
"If that's the case, what do we really have? We have the same economy we had six months ago, but with higher interest rates and a stronger dollar, and with a late-cycle economic situation, there's no upside. All of a sudden you're seeing peak auto sales," said Tipp.
Auto sales have been a pillar of the economic recovery, and on Monday, the monthly report may have sent a warning sign about consumers and the manufacturing sector. March vehicle sales were expected to come in at an annualized selling pace of 17.3 million but they fell to about 16.5 million. That was the first time sales were below 17 million since August, and they were well below the more than 18 million pace at the end of last year.
The number was another nail in the consumption outlook, after last week's disappointing consumer spending report for February. On top of that, the growth picture for the first quarter is dim, with economists seeing growth of just about 1 percent.
Treasury yields turned slightly higher Tuesday, as Trump spoke with CEOs, promising infrastructure spending and deregulation, but some strategists saw that as just a minor correction in the recent trend of lower rates.
Treasurys sold off sharply after the November election, when Trump promised he would launch a massive stimulus package and slash corporate and individual taxes. The number of traders with short positions surged, meaning, they expected bonds to continue selling off and interest rates to rise. But traders who were short have been getting out of those positions, and the preferred trade in Treasurys has been to buy.
Treasury short positions
Strategists say they are watching the threat by Senate Democrats to filibuster Judge Neil Gorsuch's Supreme Court confirmation this week, and the warning by Republicans that they will change the rules of Congress to vote him in anyway. While it is not seen as market moving, it is another look at the lack of cooperation in Congress.
"The political capital that needs to be expended to get the noneconomic changes through, the less momentum and support Trump will ultimately have for his market-friendly initiatives," said Lyngen.
The next big political showdown could come around the April 28 deadline for Congress to pass a budget to keep the government from shutting down.
"Watching how the continuing resolution at the end of the month is resolved will be constructive in terms of how Republicans and Democrats are able to get along," said Mark Cabana, Bank of America Merrill Lynch's head of U.S. short-rate strategy.
"Both parties have an incentive to try to get that resolved in a timely way. The Congress is only in session for the rest of this week, and then a few days in late April. Something needs to happen quickly on that, and depending on how easy that is, it could signal how they will work on other results," Cabana said.