Markets finally got a reminder that Donald Trump hasn’t forgotten his promise to boost spending and slash taxes, but that may not be enough to revitalize one of the more resilient reflation trades his win inspired.
In recent days, BlackRock Inc. Chief Executive Larry Fink and economists at Goldman Sachs have raised doubts on how fast any pro-growth policies like infrastructure spending, tax cuts and deregulation might materialize -- or whether the net effect of the policies will even be beneficial.
While U.S. stocks rose to records, the dollar jumped and Treasuries fell after Trump said Thursday that details on tax cuts would emerge within weeks, market-based measures of inflation expectations -- derived from the difference between yields on Treasuries and their inflation-protected brethren -- are trending lower.
“For the markets, the honeymoon is starting to end with Trump,” said Thomas Simons, senior economist at Jefferies LLC in New York. “We need to see something real -- we can’t just continue to base current pricing on some nebulous fiscal policy we don’t have any details on."
In the Federal Reserve’s statement on Feb. 1, officials deemed these market-based measures of inflation compensation "still low" despite the post-election run-up, implying any retreat in break-evens would be an argument against a meaningful acceleration in the pace of rate hikes.
In a sign of just how desperate the market is for information, break-evens pared declines after Trump told airline executives he’d have an announcement about a “phenomenal” tax plan within weeks.
That may not be enough. Trump’s proposals weren’t the only thing bolstering break-evens in late 2016. Higher commodity prices, buoyant data world-wide and firming wage growth will need to pick up the slack to jolt break-evens out of their plateau.
Favorable Crude Comps
An early progress report on the agreement between OPEC and non-OPEC nations to limit crude production will come on Friday and Monday, when the International Energy Agency and OPEC publish their monthly reports.
Two-year break-evens have shown a much stronger connection to daily movements in the front-month West Texas Intermediate contract than their counterparts at the five-year or 10-year maturities.