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RBC: Even A Trace Of Hawkishness From The Fed And Markets Will “Vote With Their Feet”

Courtesy of ZeroHedge. View original post here.

One month ago, Goldman warned that as the disconnect between the Fed’s interest rate and financial conditions, the easiest in three years, grows Yellen may have no choice but to unleash “policy shock” on the market, or in other words, be far more hawkish than priced in the by the market. After today’s latest disappointing CPI and retail sales data, she may have her chance, because as RBC warned last night, and followed up today, “this CPI was the ‘real’ event-risk for the day.

And not just CPI, but Core CPI, which today printed at the lowest level since 2015, and would have been far worse, if not negative absent the positive contribution from shelter inflation.

Here is what today’s poor data means for the Fed whose announcement is due in just under 4 hours, according to RBC’s Charlie McElligott:

3RD CONSECUTIVE WEAK CPI = LOWER RATES = REVERSE ENGINES!

As the entire global macro trade continues to be based upon the ‘disinflation vs inflation’ debate, today’s disappointing inflation data confirms the ‘slow-flation’ narrative and builds more justification into the ‘dovish hike’ Fed messaging-path (perhaps even ‘one and done’ over the balance of 2017 now).

As such, a ‘reaffirmation’ of this ‘MEH’ U.S. economic trajectory will impact markets as such:

  • lower nominal rates
  • lower breakevens
  • lower USD

Most importantly for the recent dramatic rotation experienced under the hood in the equities space which I’ve been discussing, this outcome is likely to reverse the nascent ‘YTD Growth / Value unwind’ experienced most acutely last Friday into Monday—as this is an unambiguously ‘bad’ outcome for economically-geared sectors, factors and themes, as nominal rates collapse lower and the economy looks increasingly fragile.

As such, today’s trade is likely back into the equities ‘Slow-flation’ risk-barbell that had dictated YTD returns until late last week: long ‘Growth,’ long ‘Momentum,’ long ‘Bond-Proxies’ and ‘Defensives’ against short ‘Value’ / ‘Cyclicals’ and Small Cap.  From a sector-level, expect Tech / Consumer Disc, Biotech, Staples, Utes outperformance today against U/P from Financials / Energy / Materials / Industrials.

Forward-looking, it’s going to be incredibly difficult for the Fed to continue using the term ‘transitory.’  If you think about where core inflation was ‘run-rating’ in December through February, we were at a 3% annualized trajectory.  Since then, we are running at pace of zero. 

* * *

The key now is the Fed messaging from here—one would surmise that they will HAVE TO back down from hawkish-rhetoric at the risk of market interpretation of an increasing risk of “policy error.”  As such, a very ‘dovish hike’ today is the likely outcome that can perpetuate the YTD status quo of the “slow growth but tight labor, benevolent rates and Dollar, wage pressure build-up to come” narrative.


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