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Reflate Away

Wed, Sep 27, 2017 - 2:13pm

Today’s reflation trade on Trump’s tax reform proposal and the durable goods report for August (up 1.7% versus 0.7% consensus) have adjusted a few technical relationships. The first I’d like to mention is the 10-year Treasury.

Ever since the CPI report was released a couple of weeks ago, rates have been creeping higher along with expectations for the Fed to go again in December (from 30% probability before the CPI to currently 76.4%). It appears rates may be bullishly inflecting. Note the blue circle highlighting the breakout above the red declining trendline:

10 year treasury
Source: Stockcharts.com

A pickup in the reflation trade has helped financials with a new 52-week high for the Financials SPDR ETF. Ever since Irma was downgraded and CPI surprised to the upside, insurers and financials have improved along with the Treasury yield. Financials are outperforming the S&P 500 in September with great breadth, showing 91% of the financials in the XLF SPDR ETF are trading above their 200-day exponential moving average:

xlf financials
Source: Stockcharts.com

On the flip side of the reflation trade, consumer staples are underperforming ever since June. Consumer staples typically have higher yields, paying a large portion of earnings as a dividend to shareholders. Investors become sensitive to these yields when rates rise. The chart below shows that a top has formed for the sector and its underperformance began back in June. Right about that time, Amazon announced the purchase of Whole Foods and many staples were taken to the woodshed. A top will complete if the neckline is broken by 1-3% and should influence the number of stocks within the sector holding above their 200-day exponential moving average (currently at only 50%).

xlp consumer staples
Source: Stockcharts.com

Is the reflation trade back today? It appears so, but some of the catalysts have been brewing all month with Irma’s downgrade, the CPI data, and the durable goods report today. Adding Trump’s tax reform proposal is the icing on the reflation cake.

About the Author

Chief Executive Officer, Technical Analyst
ryan [dot] puplava [at] financialsense [dot] com ()