BNY Capital Market Perspectives

Slowly Deflating Reflation Trade

The changing and at times volatile political landscape has been one of the primary catalysts in influencing asset values over the past several years. While we have had machinations from various votes and policy initiatives from around the world, the reflation trade that followed the U.S. elections has been the primary catalyst in driving broad asset class moves for the past several months. In our view, investors have been most focused on the impact that tax reform, deregulation and fiscal stimulus will have on various markets. Broadly, these expectations have driven robust risk taking, a stronger USD and rising treasury rates driven by higher real yields. Valuing the impact of these expectations has been complicated by the lack of policy detail, which we think pushed investors to assume the best and/or the worst for their asset classes. For instance, stocks were 12% higher at one point since the elections, while 10 year yields were 82 bps higher on a combination of inflation and supply concerns. As we approach the three month anniversary of the Trump administration, we have little additional clarity on the path of these policy initiatives, although the most aggressive timelines will likely prove premature. Recent comments from Treasury Secretary Mnuchin quash the idea that we will see tax reform before the August recess, a prediction that he made in February. A similar analysis can be applied to fiscal stimulus and deregulation, which will likely face an equally challenging process.

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