why Doge is not cutting through

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Morning, all. Katie Martin here. The usual Unhedged crew members are otherwise engaged so you will have to put up with me instead. Two of the biggest things that matter at the moment are geopolitics (spoiler: no one knows what’s going on) and Doge (ditto). Tell me what I’m missing: katie.martin@ft.com, or unhedged@ft.com if you’d like to reach us all at once.

Is Musk helping Treasuries?

Elon Musk’s so-called Department of Government Efficiency, is “blowing up significant parts of the US government”, in the words of Paul Krugman. Oddly, however, this is passing with barely a mention from financial market analysts.

I paraphrase, but “don’t worry about it” was the line from Barclays a week ahead of Donald Trump’s January 20 inauguration.

“Doge likely faces legal, process and political obstacles,” the bank’s analysts wrote at the time. “Doge itself cannot cut government spending, rescind regulations, eliminate departments or agencies, or terminate federal employees. In our view, the change Doge can drive through executive action is likely less (and slower) than many investors anticipate.”

Others had argued Doge won’t be able to do much because of the Republicans’ slim majority in the House of Representatives and the likely legal pushback. But none of that is ageing super well. Tens of thousands of civil servants have already been fired or suspended. The guardrails are buckling here.

Given how important institutional resilience is to the foundation of US reserve assets, you would think investors would be more exercised about all this. Some nerves are creeping in, as I wrote last week, but that’s more about reserve managers seeking to protect their assets from an unpredictable president.

More broadly, though, investors appear to be assuming this is all fine? Maybe that’s the right call. Exorbitant privilege is a powerful force, after all. (Just ask former UK prime minister Liz Truss how markets respond when smaller countries circumvent checks, balances and traditions.) Maybe the hand-wringing over Doge represents sour grapes by those of a more liberal political persuasion who are still smarting from November’s election outcome.

But another possible explanation is that Doge could be actively helping drive demand for US government bonds, in turn sending a warm glow across other asset classes.

Peter Tchir at Academy Securities is focusing on the “headline after headline of waste that is being reduced”. He went on:

Even if a fraction of the headlines are accurate, the ability to cut spending seems high. That is without focusing their attention, yet, on some of the big-ticket items in the budget. Doge alone seems able to help with the goal of reducing the deficit.

So far, I think Doge has been helping support Treasuries. Doge provides some element of hope that bigger chunks of the deficit can be trimmed without major repercussions to the economy or markets, than previously thought. The excitement about what Doge can do to the bigger line items is real.

As Tchir says, Doge has made blunders. But he certainly appears to be right that markets are focusing on the cost cuts and not the US’s institutional resilience, for now at least. And as I’ve written before, the more the markets shrug this stuff off, the further President Donald Trump and his advisers may feel they can go. Stock and bond vigilantes remain supremely relaxed about Trump 2.0 and all it entails.

Playing defence

Congratulations, I guess, to US veep JD Vance, who is this week’s main character in financial markets. His “threat from within” broadside against Europe at the Munich Security Conference on Friday went down like a lead balloon with the audience (“mad, totally mad” as one European diplomat put it). But it also gave investors something other than tariffs to chew on for a change.

The whole issue of European security has shot up the agenda for investors, especially with Vance’s boss seemingly trying to cook up a plan for peace in Ukraine with Russia’s Vladimir Putin. European leaders gathered yesterday in Paris to figure out a response.

Markets are clear, though, on how to trade this. European defence stocks have shot (no pun intended) to record highs. Germany’s Rheinmetall — the hottest stock you’ve never heard of — is up 50 per cent so far this year (not a typo — it’s up 200 per cent since the start of 2024), while BAE Systems caught a boost yesterday and the pan-regional aerospace and defence index hit its highest level since at least the early 1990s. My colleagues have much more in this piece. This will be a tricky theme to bet against for the rest of this year.

Make Japan Great Again

Japan is, quietly, on a roll, churning out an annualised growth rate of 2.8 per cent in the final quarter of last year — the third straight quarter of expansion and trouncing economists’ expectations for something more like a 1 per cent pace. Inflation data is due on Friday and the market is looking for a reading of about 4 per cent (!). 

Rabobank’s Jane Foley points out that net long (positive) positions in the yen among speculative accounts are at the highest point in decades. The weekly CFTC positioning data (no it’s not perfect, yes it’s the best the market has got) shows a 38 per cent rise in long positions in the latest reading. The market sniffs a rise in rates here.

No one knows anything, redux

If you are unfortunate/kind enough to read/listen to a lot of my stuff, you will know my guiding principle for 2025 is that no one has a clue what is going on. This is a recipe for lots of annoying market volatility, but it also points to depressed appetite for risky assets.

Jack Janasiewicz at Natixis Investment Managers seems to agree:

Are they on? Are they off? Delayed? Such is the life of investors trying to digest the constant scroll of headlines attempting to decipher the outlook and impact for tariffs. The range of uncertainties runs wide. How big will the tariffs be? What goods will they cover? Are there exemptions? Uncertainties abound regarding assumptions which make it even more challenging to position accordingly.

As a result, it’s no wonder that this backdrop leaves many investors having to be reactionary rather than proactive. The key risk to such a backdrop? Confidence and sentiment begins to erode at both the corporate and household level. Never a good thing for the economy or risk assets.

Good luck!

One good read

Grab some popcorn and feast on the Murdoch family drama, if you have not done so already.

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