Day 1 of Trump’s presidency is behind us and has already caused quite a bit of volatility. The big market conclusion so far is that there are possibly less trade-related price pressures. The WSJ article highlights that no new tariffs are being implemented immediately, although 25% tariffs on imports from Canada and Mexico are slated for next month. This aligns with the post-CPI trend, where concerns about lingering inflation seasonality and a surge in goods demand have eased. Inflation expectations have eased somewhat on Tuesday when cash markets reopened. Bond markets are continuing to rally as first estimates of the upcoming PCE inflation are just a smidge above 2%, which is pretty close to the Fed’s target. Interestingly, bond yield curves have continued to flatten, indicating further pressure of steepening trade unwinds as volatility is consolidating.
The US Dollar took a beating on Monday, which made sense as a lot of tariff-related news was expected to hit the tapes, which didn’t materialise. I highlighted the lofty expectations in Friday’s Chart Book post. After Trump’s 25% tariff comments, we briefly rallied again, but this then fizzled out on Tuesday, which to me is a pretty strong signal. As for bonds, CTA’s (trend-following algorithmic trading accounts) are quite heavily long the USD (and were short bonds). Once you have a large drawdown, the volatility triggers will cause those programs to automatically reduce positions. FX is no different to bonds, so I would expect a bit of continued sell-off in the USD in the coming trading days.
Equities and Commodities (ex-oil) are being lifted by a weakening US Dollar trend as financial conditions are easing globally. Trump never shied away from opining that the US Dollar needs to weaken relative to very cheap foreign currencies. Maybe somebody (most likely Bessent) told him about tariffs strengthening his domestic currency, which would explain the non-immediate response. If you want to rebalance trade, you will need foreign demand to support your production. America’s greatness depends on the strength of its global peers as well after all.
The risk-on rally makes sense, but I’m cautiously awaiting the next chapter in this macro script. Trump is inheriting an economy on fire with plenty of bonds to roll and issues to tackle. It won’t be an easy ride. What if the setup is just too fragile for him to pull any of his grand plans? He has little room to increase the deficit without causing a further inflation/yield cycle. He has to be more careful this time around. Tariffs will be on the agenda; it’s now only a question of time and size. Is he really serious about providing more “return” to labour, which inevitably will come from capital? It’s a big ask, and I’m not sure he is willing to go that far. His meme-coin is a laughing matter as far as I am concerned. It just speaks to the time we are possibly finding ourselves in. The time of utter and blatant greed and insanity. How long can it last? Is the Fed really too tight? Animal spirits can go far, but the day of reckoning always arrives. We stick to our observing nature and look for set-ups that are unbiased and free from emotions. Stay nimble.
Let’s now have a quick look at what charts are telling us and what might have changed over the past 48 hours.
Let’s go!
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