The reflation trade is here and dancing in the streets

Outlook

The holiday today is known more for shopping than patriotic parades, and marred this time by widespread power outages due to the winter storm. Texas is undergoing rolling blackouts. Even the FT is impressed and has a map showing how cold it is in the vast lower Midwest---minus 7% F in Dallas, even colder than in Denver. The Mid-Atlantic had a rare ice storm and we are without water.

After today, we get a flood of data, including Jan retail sales, industrial production, the Empire State and Philly Fed surveys, the minutes of the last Fed meeting, and a slew of foreign data. We get inflation data from the UK, Canada and Japan, plus the flash Feb PMI’s.

We can’t help it–"market analysts just can’t let go of whether we are going to get inflation and whether the early warning system (yield curves, breakevens) is working properly. We even had a diatribe about how economics and the Fed fail to account for social justice issues in data and in financial market pricing.

Unless something gloomy comes along, sentiment has turned wildly risk-on, as we see from equity indices and maybe the sterling rally, too. What’s behind it are rising vaccinations, the prospect of the Biden recovery spending, and, dare we say it, Draghi in office in Italy and Trump out of office in the US. The reflation trade is here and dancing in the streets.

We should expect the risk-on mood to do some damage to the dollar. Are the big players finished with paring positions? The lingering spark of inflation fear “should” not have much traction but it’s too soon to call for a fat rout. The WSJ warns that the FX market’s low volatility may be about to change into a higher gear, but fails to give a reason. We do see some mysteries lurking in the shrubbery: why is sterling so strong–"is it solely a function of the vaccination success? Why is the yen weaker against the dollar?

Because of all the holidays, today will be really slow and thin. The fireworks start tomorrow.

Fun Tidbit: Prince Harry and Meghan are having another child and this one will be a US citizen. Harry is very, very far from the throne, anyway, but it does remind you that Winston Churchill’s mother was American. Alas, nothing seems to mitigate the condescension.

Brexit Tidbit: Last week The Economist had a letter to the editor that makes an intriguing point: major multinational companies feel they need the European Union. This is demonstrated by 60% of the top 20 campanies headquartered in Switzerland in 1992 having departed after Switzerland rejected joining the EU in 1992. What’s left is Dow, IBM and a few others, but “The Swiss American Chamber of Commerce has becomes a kind of museum.” Amazon, Apple, Samsung and others all moved to Dublin London and Amsterdam, and they are not coming back. Something similar can happen in Britain. Access to markets and talent counts.

Not so separately, what is the prospect of Scotland leaving Great Britain? The Economist reports popular opinion favors it, but the likelihood remains low for a second pass at independence due to procedural issues. Hmm.

US Politics: The prosecution team presented a compelling case that Trump incited a mob to halt the certification of the election votes. Moreover, a timeline shows that invalidating the true vote was planned from the very beginning, starting by sabotaging mail-votes by removing mailboxes and constricting the Postal Service, moving on to harassing and intimidating state officials, pressing VP Pence to halt certification, and ending with the mob to do that job. There was talk of a military coup, too, although no evidence it was anything more than chatter; Trump’s appointment of wildly unqualified lackeys to top Pentagon positions points to something, but nobody knows what, exactly.

The Trump defense team presented a weak argument. It engaged in blatant false equivalency, accusing the Dems of hypocrisy for defending Black Lives Matter activists incited and defended by Dems who then turn around and accuse Trump of inciting sedition. Ah, but BLM activists were wielding placards, not guns and gallows, and as far as we know, not threatening to kill anybody or halt Congress’ conduct of its business. To be fair, some hooligans used BLM as a cover for vandalism and robbery, but nobody ever defends them.

The defense also tried to sneak in Trump’s state of mind and therefore intent, which should be handled only by direct cross-examination, but that backfired when the defense refused to give a clear answer as to Trump’s response when he found out that the mob was threatening the lives of Pence and members of Congress. He was told that Pence had been spirited away to a safe room and declined to call for any counter-action for a good 90 minutes. It’s the Nixonian question of “what did he know and when did he know it?” This gave a last-gasp whiff of hope to the prosecutors, but failed to carry the day.

In the end, the vote was 57-43 to acquit, meaning 7 Republican senators voted to convict. This is a small but not token instance of bipartisanship and the only good thing to come out of this ordeal. In addition, Senate leader McConnell gave a thundering speech, saying Trump was undeniably guilty of a “disgraceful dereliction of duty” on Jan 6. “There’s no question –" none –" that President Trump is practically and morally responsible for provoking the events of the day.” The NYT calls it a diatribe worthy of the Democratic prosecutors. McConnell continues to say Congress had no right to impeach once the officeholder had left office, an empty argument since he was the one who had refused to call the Senate back into session to receive the article of impeachment from the House while Trump was still in office. His refusal accounts for the House’s delay in delivering the Article. Same old weasel.

What’s next? Whatever Trump decides to do, he will be hamstrung by upcoming court cases in New York and also Georgia, where Trump tried to get election officials to falsify election results, a crime in that state.

The problem is that the groups who think they are Trump allies will only get more extremist, secretive, and violent. This is the lesson from terrorism experts, who point to extremists in places as improbable as Norway and New Zealand. In addition, we are in for a tiresome and probably long-lasting debate about the future of the Republican party, now that it has disgraced itself. It’s going to be very hard to put lipstick on this pig. At the same time, nobody can even catch the dozen or so pigs of the Dem party and sure enough, criticism of the Biden administration already started just one day after the impeachment trial.

Thus ends, probably, our politics section, although it may come back under “current affairs” as the relationship of the US and China wends its way in and out of the headlines.

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This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

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