The reflation welcome mat

May 17, 2019

–Yields edged a bit higher yesterday with tens +2 bps to 2.398%.  Red pack was weakest on the dollar strip falling 5.0; greens through golds were -4.5 to -3.0.  Just a minor rise in yields causes USD strength which is in turn, deflationary, and should be a negative for US equities.  Maybe that narrative doesn’t quite hold, but stocks are a bit weaker this morning, supposedly due to souring trade talk.  Interestingly, Brainard and Kashkari both made comments yesterday regarding the idea of a ‘welcome’ overshoot in inflation.  Kashkari thought it might come through increased wages and Brainard, through increased import prices.  Brainard opined that the Fed might sit back during this “opportunistic reflation”.  At the same time, currencies are opportunistically adjusting to absorb potential price increases.  For example, the Korean won has weakened consistently from the end of April when trade talks broke down, from 1140 to 1196 this morning.  The Chinese yuan has also fallen this morning to a new recent low, now at 6.915.  A story on Reuters cites officials as saying China will use reserves to prevent CNY from piercing 7.0.  Know what that means?  It’s going straight to 7.  In the same way, Trump says he hopes the US can avoid war with Iran.  Know what that means?

–It’s true that import prices might go up due to tariffs and a decline in global trade. but strength in USD and possible faltering in US stocks is a major counterbalance.  And while the Atlanta Fed wage tracker has gently firmed over the past six years of so, it shows little sign of acceleration in spite of record low unemployment rates.  

–This morning brings Leading Indicators expected +0.2 and U of Mich sentiment numbers. 

Posted on May 17, 2019 at 5:19 am by alexmanzara · Permalink
In: Eurodollar Options

Leave a Reply