10Y dollar fed fomc reflation S&P 500 yellen

“It’s The Reflation Trade, Baby!” These Are The Levels To Watch On Friday

"If two-year Treasury yields close above 1.3% but 10-year yields linger below 2.5%, then a hike is expected but it’s being perceived as a potential policy mistake. If we close above both levels, it’s the reflation trade, baby."

If your head isn’t up your ass you know that today is all about Janet Yellen and Stanley Fischer.

Well, that is of course unless another member of Trump’s cabinet turns out to be a de facto Russian spy which, as we learned on Thursday, is always possible.

Needless to say, there’s exactly zero room for any pussy-footing around from Yellen. When f*cking Lael Brainard has gone full-hawk, there’s no turning back.

How the market trades the commentary however, is another story. As Bloomberg’s Mark Cudmore notes, ideally you don’t want to see bear flattening. That would suggest that the market views a potential March hike as a policy mistake.

So if you’re betting on the animal spirits that have put Sharon on the fast track to the S&P promised land, then you want the 2Y above 1.30 and 10s above 2.50 heading into the weekend.

Find more color below.

Via Bloomberg’s Mark Cudmore

It’s a quiet consolidation session ahead of speeches by Yellen and Fischer. Investors are waiting for a binary moment which may never arrive. Fundamental analysis is temporarily neutered so take note of the key levels to watch.

  • It would be a remarkable communications disaster by the Fed if Yellen now proactively tries to deflate trader expectations for a March rate rise. It would signal that the committee is directionless and lacking conviction in its abilities to adequately manage monetary policy
  • Yet markets trade as if they seem unconvinced that a March hike will happen or that it’s a smart idea. Yellen may not change the skeptics’ minds on either front. She’s likely to implicitly, but not explicitly, back the hawkish message from Brainard and Dudley. And nothing she will say will alter the hard data that justifies whether or not to tighten policy now
  • As market participants rather than policy makers, ours is not to reason why, ours is but to sell or buy…or to do neither. The week’s closing levels will confirm how traders are spinning the story
  • If two-year Treasury yields close above 1.3% but 10-year yields linger below 2.5%, then a hike is expected but it’s being perceived as a potential policy mistake. If we close above both levels, it’s the reflation trade, baby.

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  • A two- year close below 1.3% and traders are saying Brainard and Dudley might have misled them
  • The FX breakout levels are 111.60 and 115.00 in USD/JPY and $1.0490 and $1.0600 in EUR/USD
  • Equity bulls have plenty of room. A mini-correction shouldn’t cause panic. Above 2,300 in the S&P 500 Index and everyone who bought before the last month is still onside and happy
  • The broader commodity complex continues to trade poorly but this is likely just a consolidation within a structural growth story so don’t put too much emphasis on the short- term correction as an indicator
  • Oil is the wild card and may be an idiosyncratic story. It remains within the narrowing range of the past three months. A downside break seems more likely to me but that’s an economic positive even if a short-term financial market negative

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