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“A Shift from the FOMC: As the Fed has opened the door to using balance sheet reduction in lieu of rate hikes – bond bears are running for the hills. As we head into a busy week of Fedspeak, we believe capital gains are found by discounting the obvious and positioning for the unexpected. In a world full of crowded trades searching for alpha – these words ring more true today than in years past. As the wild mob is rushing for the exits, we want to be short bonds.”
Bear Traps Report, Monday June 26, 2017
Commodities soared this week in a Reflation Revival, were you on board?
The U.S. economy slow down is not as bad as most feared. Q1 GDP came in better than initial estimates due to unexpectedly higher consumer spending and a jump in exports, beating expectations and providing a slightly more encouraging outlook for growth this year. Gross domestic product increased at a 1.4% annual rate instead of the 1.2% pace reported last month, the Commerce Department said in its final assessment for the period on Thursday.
Breaking: Inflation in Japan, Fastest since 2014
Consumer prices excluding fresh food advanced 0.4% in May from a year earlier, the fastest gain since December 2014, when the impact of a 2014 sales-tax hike is excluded (estimate 0.4% ).
Hawks at the BOE, BOC, ECB and FOMC
A hawkish turn from Janet Yellen and Mario Draghi have some now looking for a reflation trade revival. A focus on financial conditions. The prospect of four of the world’s five largest central banks moving to tighten policy at the same time is shocking traders after years of easing, with the dislocations in money markets also rippling through global bonds.
10 Year Bond Yields in June
UK: 0.92% to 1.25%
US: 2.12% to 2.28%
Germany: 0.22% to 0.45%
Bloomberg
Hawkish Quotes from this Week
“some removal of monetary stimulus is likely to become necessary”
Bank of England’s Mark Carney
“deflationary forces have been replaced by reflationary ones.”
European Central Bank’s Mario Draghi
“rate cuts have done their job”
Bank of Canada’s Stephen Poloz
Bond Flash Crash
Last week’s crowded long bond trade is unraveling quickly. A colossal seller kicked off a flash crash this morning. Positioning in long U.S. Treasury positions recently moved from very short to a crowded long – today bond bulls are running for the hills.
Deregulation Reflation
A Hidden $1T Stimulus: Trump could repeal enough regulations to give a $1 trillion boost to the economy, just ask Treasury Secretary Steve Mnuchin. We get into what’s going on behind the scenes in Washington. Much of the Dodd Frank re-write can be achieved with executive orders – this is a reflation boost in the wings.
New Shorts Became Longs in a Hurry
Student body left… Student body right. U.S. Treasury bears in January became bulls in June, not they’re rushing to the exits.
U.S. President Donald Trump has said during his election campaign that he would cut banking regulation. The U.S. Treasury Department earlier this month proposed easing up on restrictions big banks now face in their trading operations. The financial industry is counting on President Donald Trump to soften that oversight by appointing more business-friendly board members to the Fed, shifting the balance of power from regulators to shareholders. This month, Treasury Secretary Steven Mnuchin recommended that stress tests be performed every other year and that banks maintaining a sufficiently high level of capital be exempt from exams.
“Reflation Bar is Too Low: Our thesis is clear – markets have moved from pricing-in far too much stimulus out of Washington to now under-estimating its reflationary potential. Once crowded reflation trades have been left in the dust bin – not even the cleaning lady will touch them. Congress has their back against the Wall with an eye on the 2018 mid-term elections – the GOP can ill afford go home empty handed. In December and January, we stressed tax reform was a 2018 story while the street was talking up a rosy hundred day kickoff. Now, the Street is way out in 2018, while we’ve moved the probability of 2017 tax reform / cuts up substantially.”
Bear Traps Report, Monday June 26, 2017
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Don’t miss our next trade idea. Get on the Bear Traps Report Today, click here
Yellen’s Hawkish turn has helped fuel a global reflation revival. Just when Wall St. threw in the Reflation towel, she started a comeback.
Yields spiked today on a hawkish turn from Janet Yellen and Mario Draghi – Central bankers talked up removing accommodation while focused on asset bubbles. Yellen even talked up risks we’ve stressed to clients in recent months- PIK Toggle Structures – extremely aggressive financing in the corporate bond market.
In our view, the FOMC is NOT comfortable with easing financial conditions as they hike rates. The Fed is trying to do things now “in a more systematic way” and “talk to people in different pieces of the financial sector about all of the things that could conceivably go wrong that are not in our models”
Today will mark a key sector rotation inflection point. Market leadership is shifting from the loved to the un-loved.
Quants and algorithmic trading now make up over 30% of the volume across several of the major exchanges. That’s up from less than seven percent five years ago. What’s the only problem with a quant driven market? At the first sign of trouble, the machines simply back away – air pockets are far more common today. 
