Posts

Did Trump Just Kill The Reflation Trade? April 13, 2017

/in /by

Did Trump Just Kill The Reflation Trade? An excerpt from today’s Sevens Report.

Trump - YellenPresident Trump, in an interview with the WSJ yesterday, appeared to change his policy on the Fed and interest rates. Specifically, Trump said he thought the dollar was getting too strong, that he favored a low interest rate policy, and he was open to keeping Yellen as Fed Chair. It was the second two comments that caught markets attention and caused a “dovish” response in the dollar and bond yields (both of which fell).

The reason these comments were a surprise was because it was generally expected Trump wouldn’t keep Yellen and was in favor of a more hawkish Fed Chair and appointing more hawkish Fed governors (there are currently three vacancies on the Fed President Trump can fill).

So, the market was expecting Trump to be a hawkish influence over the coming years, but yesterday’s comments contradict that expectation.

Going forward, from a currency and bond standpoint (the short term reaction aside) I do not see Trump’s comments as a dovish gamechanger for the dollar or rates. Yes, near term it appears the trend for the dollar is sideways between 99.50ish and 102 while the 10-year yield has broken below support at 2.30%.

But, I don’t see Trump’s comments sending the dollar back into the mid 90’s, nor do I see them sending the 10 year yield below 2%.

I also don’t expect this dovish reaction to be a material boost for stocks, because dovish isn’t positive for stocks any more (in fact the comments are causing the stock sell off this morning—more on that in minute).

Bigger picture, the longer-term path of the dollar and bond yields will be driven by growth, inflation and still ultra-accommodative foreign central banks.

Better economic growth (either by itself or with policy help) is the key to the longer-term direction of the dollar and rates (and we think that longer-term trend remains higher).

However, in the near term, his comments sent the 10 year yield decidedly through support at 2.30%, and that is causing stocks to drop as Treasury yields continue to signal that slower growth and lower inflation are on the horizon. And, since the market has rallied since the election on the hopes of better growth and higher inflation (i.e. the reflation trade) this drop in yields is hitting stocks.

The violation of support in the 10 year yield at 2.30% is important and a potentially near term bearish catalyst for stocks. If the ten year yield doesn’t stabilize and make some effort to rally over the next few days, a test of 2300 or 2275 in the S&P 500 would not shock me.

Cut through the noise and understand what’s truly driving markets, as this new political and economic reality evolves. Get your free 2-week trial at the Sevens Report.

10 Year Treasury: January 23, 2017

/in /by

10 Year Treasury

10 Year Treasury: The greenback ended a volatile week little changed as the Dollar Index dropped more than 1% last Tuesday after now-President Trump called it “too strong.” Then a hawkish tone from Yellen on Wednesday, and dovish comments from ECB President Draghi Thursday, helped reverse that initial decline. The Dollar Index ended the week down 0.30%.

The headline volatility around the dollar last week is likely a preview of what’s to come over the next year (it’s going to be a good one for currency brokers) because while the trend in the Dollar Index remains clearly higher, there will be bouts of sharp declines due to politics, economic data, etc. However, at its core, the rising dollar is an economic and interest-rate phenomenon, not a political one.

Turing to bonds, yields were sharply higher last week on a combination of firm inflation data (CPI, Prices Paid indices, Beige Book commentary) and Yellen’s hawkish tone from Wednesday. The 10-year Treasury yield rose 7 basis point while the 30-year yield rose 6 basis point, the first weekly rise since early December.

Going forward, depending on economic data, it looks like this counter-trend rally in a greater bond decline is coming to an end, and we are watching 2.60% in the 10-year yield specifically. If that level is broken, then we could see a potentially sharp acceleration in Treasury yields, and stocks will definitely start to notice if/when the 10 year approaches 3%. Economic data needs to continue to accelerate for stocks to weather that type of a rise in yields.

This Week

The key number to watch this week is the flash manufacturing PMI out tomorrow. As stated, that number needs to remain firm for general market psyche, because we’re likely to encounter at least temporary disappointment on the fiscal stimulus front in the next few weeks (as is typical in Washington).

Beyond the flash global PMIs, Durable Goods and Q1 GDP are the two next most important numbers. Durable goods will offer the latest insight into business spending, which needs to continue to accelerate. GDP won’t mean much from a market standpoint but the media will cover it, and anything north of 3% will be taken as a positive (although a number that high is unlikely). For all the optimism over future growth, right now the economy is still stuck in 2%ish annual growth mode, just like we’ve been for the last several years.

Finally, Existing Home Sales comes Tuesday, and as we mentioned last week, it’s critical to the economy that the housing recovery doesn’t get derailed by higher rates. Last week’s Housing Starts data was mixed, so focus will remain on the December data, as that was the first full month of consistently higher rates.

Bottom line, the key here is acceleration in the data. Better economic growth and hope of fiscal stimulus has powered stocks higher, but the latter will likely get delayed due to regular Washington shenanigans. To counter that, growth needs to continue to accelerate.