Reflation Frustration

This is probably a decent time to start asking yourself if the narrative still makes sense.

If you got anything out of Steve Mnuchin’s comments on Thursday it should probably be that no matter what Steve Bannon says (there are a lot of “Steves” in this administration), Trump isn’t going to be able to do everything he said he was going to do overnight.

Some of this sh*t is going to take some time, and unfortunately for you dear investor/trader, the stuff that’s going to take a while is the good stuff. That is, it’s tax reform and fiscal stimulus that are going to take months and months and months to craft, pass, and implement. Meanwhile, you get to sit back and watch as the new administration’s Bannon-engineered social policies move ahead at warp speed. That is not a good combination.

Here’s how one FX trader summed things up on Friday morning:

Steven Mnuchin’s dose of reality for investors in relation to the fiscal stimulus has triggered a disinflationary theme to markets that will impact many assets classes. Yesterday, I wrote that Trump’s speech to congress on Tuesday may mark a capitulation point for reflation trades. It appears that Mnuchin has tried to pre-empt him. Amid comments on a wide array of financially relevant topics, markets should really be focusing on his admission that the stimulus won’t help the economy much this year and the confirmation that passage of tax reform is unlikely to be imminent.

Gee, who could have seen that coming? That’s sarcasm.

Things were pretty quiet overnight, but the trend with regard to the cherished reflation meme is clear:

And I’m not sure it’s possible for Donald Trump to revive the reflation trade next Tuesday in his speech to Congress either. It’s a damned if he does, damned if he doesn’t type thing. If he makes a bunch of headline-grabbing bombastic comments, he may succeed in preserving the narrative for a few days or weeks, but then the bar will be set even higher, thus raising the odds of disappointment. If he outright fails to deliver or otherwise f*cks up his speech, then you’ll see the Trump trade faded with a vengeance starting promptly with USDJPY while he’s speaking.

So that’s where we stand on that.

Here are a few soundbites and other notables from overnight:

• Gold holds near a three-month high as the dollar weakened after U.S. Treasury Secretary Steven Mnuchin said he expects low borrowing costs to persist.

• “Mnuchin didn’t say anything that should come as a surprise and reaction to his comments shows how hungry markets are for anything to cement their expectations,” says Takuya Kanda, senior researcher at Gaitame.com Research Institute in Tokyo. “Nevertheless, the dollar remains capped on wariness about Trump and his policies”
• French Socialist presidential candidate Benoit Hamon said he’s still willing to meet with far-left rival Jean-Luc Melenchon to discuss a joint bid, but that he should be the candidate.
• The onshore yuan’s 12-month forward points decline for the fourth week in a row, the longest run of losses since June last year, and volatility tumbles amid easing depreciation pressures on the Chinese currency
• The Bloomberg Dollar Spot Index is poised to end a two- week advance
• There’s no urgency to brand China a currency manipulator, says U.S. Treasury Secretary Steven Mnuchin. While U.S. President Donald Trump was cited as declaring China a “grand champion” at currency manipulation, he has so far held off on his campaign threats of applying that brand on the Asian nation
• European equities see $1.1b in net inflows in week to Feb. 22, the most in 55 weeks, BofAML strategists write in note, citing EPFR Global data.

In Asia, markets were mostly lower. The Nikkei was off a half a percent on a firm-ish yen. European markets are down across the board. Watch the front end of the German curve – lots of chatter about Schatz making the rounds. Ask yourself whether 55 week highs in inflows to European equities are consistent with record low Schatz yields. Or, as one FX trader put it this morning, “buying safe assets as a hedge for the reach for yield is the unhealthy kind of hedging.”