US: Is the “Trumpflation” trade back? - Westpac

Sean Callow, Research Analyst at Westpac, notes that over the past 10 days or so, the US 10 year Treasury note yield has recovered from 5 month lows under 2.20% to above 2.30%, while pricing for another Fed rate hike by June has bounced from 39% on 18 April to 61% this week (Bloomberg estimates).

Key Quotes

 “Arguably the most yield-sensitive major pair, USD/JPY, has leapt from near 108 to above 111 over the same timeframe.”

“Admittedly, an improvement in risk appetite stemming from Europe has played a role in the rise in US yields and USD/JPY. French opinion polls proved very accurate in projecting a win for Europhile and former economy minister Macron, so markets were quick to price out the risk of a Le Pen win in May. The cost of hedging against EUR/USD risk in May collapsed.”

“Macron’s win was clearly viewed as positive for risk appetite outside the Eurozone too, with the S&P 500 jumping 1.1% on Monday, its strongest day since 1 March. But domestic factors are of course also in play. US survey data such as consumer and business confidence may be off recent highs but remain firmly upbeat. US Q1 GDP is shaping up as soft, but the consensus forecast of just 1% annualized is probably bearish enough and seasonal adjustment problems for Q1 are well understood at the Fed.”

“President Trump’s tax plan however has not supported USD and yields to the extent we expected. The one page of bullet points did not mention key details such as personal income brackets (just the rates) or the rate on a repatriation tax break. Its brevity and vagueness gives the impression that it was rushed out in order to be announced before President Trump’s 100th day in office (Sat).”

“The US dollar and bond yields fell after the tax “plan” release. But it is still early days and some form of fiscal loosening still looks likely, supporting growth and the Fed’s plans to raise rates.”