US: Reflation needs a reboot - SocGen

In view of Kit Juckes, Research Analyst at Societe Generale, faltering US inflation expectations have emboldened the market to mark down its expectations of the Fed rate path and this has robbed the dollar of yield support.

Key Quotes

“As base effects from last year's rise in energy prices start to fade, the pull they had on inflation is ending, leaving behind a growing sense of 'Meh'! Tight labour markets don't deliver faster wage growth and soft real wages don't deliver any kind of additional kicker to economic recovery. With the Federal Reserve looking more like a dove than a hawk, let alone a leopard that has changed its spots or grown some teeth, the dollar rally has fizzled out.”

“With Donald Trump's chances of delivering significant fiscal stimulus now lessened, the pressure on the Fed to be at all aggressive is further reduced. The result is that a slower path of rate increases delivers a later and probably lower peak in real rates and real yields, which in turn means a significantly lower peak in relative real yields and a lower peak for the dollar. And it gives me the heebie-jeebies that if the only lesson the Fed has learnt from 2008 is the need to have better-capitalised and regulated banks and not the need to avoid over-stimulating asset prices, then we are less able to avoid the next crisis.”