HAS THE REFLATION TRADE RETURNED?

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By: Kent Engelke | Capitol Securities
From: 2/10/17

Equities advanced for a myriad of reasons; earnings, potential tax cuts and an advance in crude. Treasuries declined for similar reasons for a tax cut should increase economic activity, activity that will increase the demand for crude, an increasing demand as the markets become “balanced” as according to Goldman. The combination of higher growth and oil may stoke inflationary pressures.

As inferred above, the financials and energy led the advance.

Commenting further about the selloff in the Treasury market, the 30-year auction as met with tepid demand, weak demand perhaps the result of weekly jobless claims falling to a three month low and the four week moving average in now at the lowest point since November 3, 1973.

The Labor Department stated the latest tally marks 101 straight weeks of claims below 300,000, a level considered as a “healthy labor market.” The 161 weeks that ended in April 1970 was the longest streak on record below 300,000, records that commenced in 1967.

Will wage or cost push inflation to begin to accelerate? Such would be welcomed by workers and the economy, but would be the bane of Treasury holders.

President Trump is attempting to boost wages partially by protectionist trade policies and immigration reform.

Today President Trump meets with Japanese Prime Minister Shinzo Abe. Will Trump broach the subject of currency manipulation, an accusation that he made several weeks ago? As I noted yesterday, all countries manipulate their currencies either overtly (devaluations) or covertly (monetary policy). Some believe this is a precursor of a meeting later with Chinese officials.

What will happen today?

Last night the foreign markets were up. London was up 0.30%, Paris down 0.01% and Frankfurt up 0.32%. China was up 0.42%, Japan up 2.49% and Hang Sang up 0.21%.

The Dow should open little changed with Trump’s tax comments in focus. The 10-year is off 6/32 to yield 2.42%.

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