As noted this morning, there are three drivers to today’s action: i) last week’s Trump promise of “phenomenal” tax cuts, ii) tomorrow’s Janet Yellen testimony before Congress in which she is expected to sound hawkish, and iii) the overnight end of China’s reverse repo drought which injected CNY100 billion in liquidity in the banking system after a 6 week pause. It is these three that prompted a return with a vengeance to the “Trump Trade” euphoria, which as RBC’s Charlie McElliggott writes in his intraday note, is why the “reflation trade is back with a vengeance.”
Here is the head of RBC’s cross asset desk explaining why after a few weeks of radiosilence on “Trumflation, the reflation trade is back on.
REFLATION BACK WITH A VENGEANCE AS POSITIONING-EXCESS REMOVED
From an ‘event risk’ perspective, the double of Tuesday’s Janet Yellen’s Humphrey Hawkins testimony commencement and Wednesday’s US CPI release I believe should set the table for another weekly grind higher in US rates. It seems to me that the risk into HH is that due to data supporting the case to reach the Fed’s Congressionally-set mandates, Yellen will lean ‘hawkish’ and keep ‘3 hikes in 2017′ on the table – especially in light of ‘pivots’ towards the tighter end-of-spectrum from other Fed members. The market’s current ~20% OIS-implied probability for March should likely be closer to a coin-flip as well (and is now ticking-higher as we speak).
This post was published at Zero Hedge on Feb 13, 2017.
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