Did Treasury Secretary Mnuchin play 'reality' bad-cop to President Trump's 'fantasy' good-cop this morning?
RBC strategists Charlie McElligott and Mark Orsley reflect on Mnuchin's 24 hour media blitz below as he reset tax plan expectations (lower) and pushed off infrastructure plans (later).
**BIG DEAL ALERT**: Treasury Secretary Mnuchin has now interfaced with the financial media 4 times in the past 24 hrs (WSJ, CNBC, Fox Biz and Bloomberg TV), all of which were opportunities to emphasize the key stock / USD / rates event input being the scope of the Trump administrations ‘corporate tax cut plan’…but did not.
In these 4 media interviews, Mnuchin:- Explicitly stated focus is now on individual tax cuts against tax code simplification for corporates (“we’re mostly focused on middle-class tax cut”). I.E. a downgrading of aspirations from the prior-focus of “lower tax rates” to now said “reform.”
- Infers / implies changes in corporate tax code rather than emphasizing previous aspiration of 20% corp tax rate.
- Also proved out that BAT is still being debated (“looking closely at border adjustment tax” followed by “some issues with border adjustment tax”) which implies they know they can't get to 20% corp tax rate without it (and thus the shift to individual tax cut prioritization).
- One could infer that if they are downshifting expectations on corp tax cut to corp tax simplification, the BAT itself becomes unnecessary complication, and this is an input into a weakening USD.
- If you were expecting tax policy clarity soon (per the Feb 9th Trump line “We’re going to be announcing something over the next, I would say, two or three weeks that will be phenomenal in terms of tax”)…be prepared for disappointment. Treas Sec Mnuchin clearly-stated that his timeline is for August (admitting it is an “…ambitious timeline”), in line with Speaker of the House Paul Ryan’s hopes to map out said tax reform prior to the recess.
In addition, as opposed to a belief going-into these interviews that Mnuchin would more aggressively message their pro-growth policies, he instead talked-DOWN growth expectations.
- “nothing we can do in the short term to affect growth.”
- “new policies will have limited impact in 2017.”
- “could be late 2018 to get to 3% growth.”
Finally, we see Axios (which has proven in early days to have credible proxity to the Trump administration) report that due to the congressional backlog (ACA, tax reform, budgets, debt limits and the SCOTUS), the infrastructure bill has been pushed-back into 2018.
What does this mean for markets?
Mark’s first thought was that this was Mnuchin in real-time “talking down the USD” (ANOTHER indication that the administration has-to abide by the conventional ‘pro-Dollar’ rhetoric…but in the ‘here and now’ clearly desires a weaker currency), which as we all know is considered the most crowded trade in markets. USD longs are being hit while UST / ED shorts are being squeezed on this reset of the ‘fiscal policy kicker’ (1. tax policy downgrade, 2. infrastructure delay) and growth expectations being re-priced lower…’knocking on’ into popular ‘reflation’ trade positioning.
* * *
Just looking at intraday behaviors thus far today, we are seeing clear signs of ‘reflation’ unwinds and popular long / short gross-downs evident:
‘US DOMESTIC REFLATION’-LINKED LONGS / SHORTS:
THEMATIC LONGS / SHORTS:
This speaks to a risk I highlighted in last week’s trade / hedge idea pieces, which was that a rates / Dollar reversal set-up for the potential of large thematic reversals as well (e.g. cyclicals over defensives, high beta over low, small cap over large) at the slightest tweak in sentiment around fiscal policy.
Mark and I believe this “policy expectation reset” comes at a critical juncture ahead of 2 significant event-risk events next week and beyond which synchronizes with imminent chart breakouts across key assets USD and rates.
- Trump speech to the joint session of Congress on Tuesday night
- PCE data that Harker flagged as key to March hike decision
- Friday Fed speak D-day: Yellen, Fischer, and Evans all speak pre-March meeting blackout
- ECB on March 9th where capital key discussion could be market moving
- FOMC meeting on March 15th
Consolidation formations across multiple asset classes (that all interrelate) will have resolution imminently:
US 10yr rates have been consolodating since December, but the apex of the consolodation occurs by the end of March at the latest. Thus you could have resolution in the next couple weeks. We have been arguing for higher rates but textbook technicians would argue that the odds (64%) are skewed towards a breakdown. Addiitionally, given the Bund breakout towards lower yields, there is significant risk of a short covering rally taking yields lower also in the US. Therefore, you have to be cognizent of the risks of a yield breakdown in the US…
Source: Bloomberg
The US Dollar will have resolution even sooner as its apex will be realized no later than March 7th. The Mnuchin comments could cause a painful break lower, and if US rates end of breaking down, that will cause rate differentials to work against the USD…
Source: Bloomberg
The point being above that there is absolutely scope for the two key asset inputs--rates and USD—to experience a pain trade’ move lower (and inherently the ‘reflation’ themes to unwind as noted above), with the charts indicating that this could happen in very short-order.
