Market Hope on a ‘Guarded’ Implementation of Trump Policies Seriously Challenged

Markets

The rise in US yields and the dollar showed signs of fatigue lately, hardly reacting to positive data. What can’t go up, must come down. Donald Trump picking Scott Bessent for Treasury Secretary yesterday was a perfect trigger for a countermove. While fully supporting Trump’s tariffs and tax cuts, markets considered him as a relatively moderate/pragmatic profile. This was perceived as giving some comfort on the potential inflationary impact of future policy and to some extent mitigated worries on fiscal exuberance. US yields in a bull flattening move declined between 10.5 bps (2-y) and 12.7 bps (10-y). A $69bn 2-y US Treasury auction attracted solid investor demand with a strong bid-cover ratio of 2.77 and printing 1.8 bps below the WI bid, reinforcing the intraday bond rally. Fed governors Kashkari and Goolsbee suggested they were still open to considering rate cuts at the December meeting. German Bunds underperformed Treasuries in the wake of Friday’s post-PMI rally. Yields changed between +3.3 bps (2-y) and 5.5 bps (30-y). The Bessent nomination also triggered a positive open on US and European equity markets, but the move lacked conviction, leaving limited gains at the close (EuroStoxx 50 +0.23%; S&P 500 +0.3%). The dollar fell prey to some profit taking. DXY dropped to close at 106.82 compared to 108+ levels briefly touched on Friday. EUR/USD tried to regain the 1.05 levels but gains couldn’t be sustained with a close at 1.0495. The (temporary?) global relief didn’t help sterling much as it underperformed the euro (close EUR/GBP 0.835).

Yesterday’s market hope on a ‘guarded’ implementation of Trump policies, is already seriously challenged this morning as the US president-elect announced additional tariffs on Canada, Mexico and China (cf infra). Asian equity indices mostly show losses between 0.5% and 1%. US yields gain modestly and so does the dollar (DXY 107.1, EUR/USD 1.048). The damage for the likes of the euro could have been bigger, but we don’t draw any conclusion from the fact that Trump didn’t say anything about tariffs on European imports. It’s still a long way to January 20. At 153.9, the yen continues its recent outperformance. In this respect, Japanese October PPI services price inflation (2.9%) jumped more than expected. A sub-indicator considering firms with a high labour cost ratio at 3.3% even jumped to a multi-year high, reinforcing the case for the BOJ to proceed with policy normalization, maybe already at the December meeting. Later today, the calendar contains US consumer confidence (Conference Board) and housing data (prices, new home sales). The Fed will publish the minutes of the November 7 meeting. Data probably will be secondary to ‘announcements’ from the Trump administration. In this respect we look out whether yesterday’s correction in US yields and the dollar has much further to go. Markets will also keep an eye at multiple ECB speakers looking for ‘guidance’ on the December rate cut.

News & Views

US President-elect Trump posted on his Truth Social platform that he’ll slap steep tariffs on Mexico and Canada on his first day back in office. He will charge both neighboring countries a 25% tariff on all products until “Drugs, in particular Fentanyl, and all Illegal Aliens stop this Invasion of our Country”. Doing so would likely end the trade agreement (USMCA) from his first term in office. In a separate post, he also aimed at China for not doing enough to stem flow of drugs or migrants to the US.: “Until such time as they stop, we will be charging China an additional 10% Tariff, above any additional Tariffs, on all of their many products coming into the United States of America”. Local currencies clearly underperform this morning. USD/CAD set a new multi-year high above 1.41. USD/MXN jumped to the YTD top of 20.75 and USD/CNY returns to 7.25 for the first time since the end of July.

The British Retail Consortium’s shop price index showed overall prices rising by 0.2% M/M in November, with both food (+0.3%) and non-food prices (+0.2%) increasing. Annual shop price deflation of 0.6% in the 12 months to November followed a 0.8% drop in the 12 months to October. BRC chief executive warned that “with significant price pressures on the horizon, November’s figures may signal the end of falling inflation”. She warns that stores will pass on higher staffing costs including those coming from a rise in social security contributions by employers (2025 Budget) and a 6.7% increase in the minimum wage. A separate survey from British supermarket Asda warns that a drop in households’ disposable income and rising inflation could subdue Christmas spending..