You’d be forgiven for throwing in the towel on trying to understand exactly how to reconcile the inexorable rise in equities, the resilience of EM, and the weak dollar with what’s supposed to be a Fed tightening cycle.

Yes, Trump and some members of his inner circle have tried to jawbone the dollar lower at various times this year and yes, the administration’s seemingly intractable Russia problem has led the market to price out Trumpian reflation (e.g. bull flattening and a weaker greenback), and finally, yes, realized inflation has remained elusive undercutting the notion that the US economy will be able to ride without training wheels.

That said, this is a Fed that, the dovish slant applied to the March hike notwithstanding, has demonstrated a propensity for adopting aggressively hawkish rhetoric at various times even if they’ve been subsequently forced to walk it back.

So how to explain easier financial conditions? Well, Deutsche Bank’s Dominic Konstam suggests the following:

The logic here is that the (rates) market remains fearful that the Fed’s push for normalization runs the risk of lower inflation and weaker real growth that will undermine equity valuations. The self-inoculating response is therefore lower rates (5 years and out) and as we wrote last week, bonds act as a crutch to equities.

Here’s the passage from last week’s note that Konstam is referencing:

We seem to live in a world where bond yields are kept low due to supply demand dynamics where excess demand dominates and the “cheapness” of equities is a necessary consequence. The wrong conclusion to draw – and many equity folks do – is that equities can continue to do well because they are cheap to bonds. And as soon as the demand supply dynamics in the bond market flip around, this will be abundantly clear. This is wrong for the simple reason that is misses the dynamic that has had equities cheap to bonds. It is not that equities are cheap to bonds and therefore equities can keep rising and drag bond yields; instead it is that bonds are expensive to equities and by staying expensive can allow equities to become more expensive. Bonds serve as the crutch to the equity market.