The inflation backdrop means that last week’s Humphrey-Hawkins testimony by Janet Yellen was not the inflection point the summer bears were hoping for, writes BAML in the latest edition of the Thundering Word. The absence of inflation means the Fed is clearly fearful of raising short term interest rates too quickly, and boosting the value of the US dollar. On the contrary, the Fed seems quite willing to tolerate a weaker US dollar in short term in the hope of encouraging higher inflation expectations, the report says. BAML think this monetary policy setting implies three summer trades. Firstly, the Icarus trade can continue for a little while longer; “greed” takes longer to kill than “fear”, the signals for a “Big Top” in risk assets (rising rates and peak profits) are still not visible, and with so many investors wanting and needing a correction in equity and bond markets, a correction becomes much less likely. Secondly, barbell portfolios often work well towards the end of a bull market, and the best way to play further summer upside is via a barbell of tech (“growth” leaders) on one side and banks (“value” laggards) on the other. The belly of the beast for the tech rally, the Nasdaq Internet Index (QNET) and the Emerging Markets Internet Index (EMQQITR), are both at or close to all-time highs; and note the recent rally in Chinese financials. Thirdly, the Fed stance implies a weaker dollar, which should be good for commodities and resources. Often the last phase of a big rally features chasing after laggards, and energy is no doubt the greatest laggard of 2017. BAML clients can view the full piece on BAML Mercury.