On Friday afternoon in “Heresy! Don’t Doubt The Narrative,” I noted that this week was all about questioning the reflation story.
As SocGen wrote, we seem to have gotten a bit of “buy the rumor, sell the news” with Wednesday’s Trump presser. It was heavy on Russia, light on proposals for “making the economy great again.” No talk of fiscal stimulus, etc. etc.
So while we can cherry-pick data to support the case for higher rates and a stronger dollar (i.e. we can find metrics to support the year’s most crowded trades), a bit of apprehension seems to be creeping in regarding whether Trump can deliver.
It’s almost as if everyone knew this was all wishful thinking, but decided to go with it through the end of December because hell, why not have a Merry Christmas, right?
Anyway, below is some new commentary from Deutsche Bank on the extent to which the Trump trades are getting unwound – albeit gradually.
Via Deutsche Bank:
It has been almost two months since the US election results were announced, and the markets have generally taken this time to price in favorable aspects of promised policies, ranging from deregulation to tax cuts to infrastructure spending. However, with tangible details on most of these policies still missing, the market’s capacity to advance driven purely by faith is now showing its limits. For example, capital goods equities and industrial metals have recently reversed about half of their original post-election bounce, as doubts started to emerge around timing/extent of the proposed infrastructure programs. NY Fed’s GDP Nowcast indicator for Q1 2017 has dropped to 1.7%, down from its immediate post-election peak of 2.6%. The market has also started to realize that the tax-cut promises that were aired during the campaign are going to have to be offset by closing loopholes elsewhere as appetite for rising budget deficit appears to be limited among the Republican majorities in both chambers of Congress. Among such loopholes that have been actively rumored to be closed is the interest-expense deductibility.