There seems to be some debate as to the proximate cause of Tuesday’s equity market melt-up with some (the good folks over at CNBC for instance) attributing it to Trump’s executive orders and others pointing to Democrats’ $1 trillion infrastructure spending proposal.
The latter point (the $1 trillion plan) would seem to lend support to the notion that the reflation trade may not be dead after all.
Honestly, we’re just flying by the seat of our f*cking pants at this point. One day the Trump trade is dead as the President and his cabinet talk down the dollar seemingly unaware that a rising USD is a key component of the dynamic that’s driven rates and stocks higher since the election and the next day it’s alive and well thanks to executive orders and a Dem infrastructure spending plan that ironically mirrors Trump’s own spending proposal, at least in terms of proposed size (Trump campaigned on a $1 trillion infrastructure plan).
In any event, it’s interesting to note that when it comes to the reflation trinity (higher yields, a stronger dollar, and rising stock prices), the USD leg seems to be coming off.
Long USD was of course one of 2017’s most crowded trades. Between Trump’s “too complicated” comments regarding the GOP’s border adjustment tax and (inadvertent?) verbal intervention by both Trump and the new President’s Treasury pick Steven Mnuchin, you have to think the market might be starting to reconsider the viability of that trade.
Despite the fact that the broad dollar recovered from Bloomberg’s 4:30 p.m. Monday Mnuchin tape bomb, and USDJPY strength notwithstanding, DXY decoupled a bit from yields and stocks into the close. Whether or not that actually means anything for Treasurys and stocks going forward is anyone’s guess but as I said earlier, it’s worth taking note of.
So with all of that in mind, below is a bit of color from Citi on the Democrats’ $1 trillion plan.
Interesting Turn of Events — Democrats strike first.
If you had told us that on the third work day of Trump’s Presidency, we would see a $1 Trillion dollar infrastructure proposal (over ten years) take shape in Washington, we would have told you that “we have a bridge to sell you as well (yes, pun intended).” While we have remained bullish on infrastructure suggesting that higher multiples would be maintained and that increased spend could eventually arrive from a Trump-related plan, we also argued any movement in Washington would be slow and likely after tax reform and/or health care reform. Bottom line, we still think any new approved bill could be slow to evolve given the significant issue of how to pay for it. However, Democrats coming out first with this proposal, we think, is unexpected, and given our view that Trump could feel pressure to “Make America Great” by delivering on one of his key election promises (fixing infrastructure), we think this raises the probability of getting something done over time. We prefer ACM, JEC, and FLR to invest in infrastructure, but PWR and MTZ would also benefit from Senate Democrats’ proposal.