Every economically-conscious person in the U.S. is aware that Donald J. Trump, the new president, is keenly interested in economics. How will his new policies affect companies, asset markets and consumers?
Of course, there are intentions…and then there are results. In the wise words of Yogi Berra, “It’s hard to predict, especially about the future.” But economists, investors and speculators can peer into the fog and try to predict cause and effect.
https://www.wsj.com/politics/policy/trump-economic-vision-policy-plan-e570b32b?mod=hp_lead_pos1
Trump Tries to Forge ‘Golden Age’ Economy of Self-Reliance and Defiance
In describing his economic priorities, the president has referenced President William McKinley, who presided over an era of rapid industrialization
By David Uberti, The Wall Street Journal, Jan. 25, 2025
Trade-war threats. Sweeping deportation plans. A declared “energy emergency.”
President Trump’s whirlwind return to office has brought into focus his vision for what he calls a new “Golden Age” of America. A deluge of executive orders and directives in the administration’s first week shows a drive toward a more self-reliant economy that makes more products at home, pumps out more of its own oil and gas and employs more U.S. workers…
The president this week directed federal agencies to re-examine U.S. trading relationships. He promised that a 10% tariff on goods from China and 25% tariff on goods from Canada and Mexico would start Feb. 1…
To accomplish his goals, Trump wields a powerful economy whose consistent growth is the envy of the world. Unemployment remains low. Hourly wage growth has outpaced overall price increases since May 2023. Household wealth is notching records thanks to high home values and a gravity-defying stock market riding the AI boom…
Bond traders in recent months have pushed up yields on the long-term government debt that is a driver of borrowing costs, a warning shot that cutting taxes and immigration in a hot economy could boost inflation and interest rates.
A strong U.S. dollar threatens companies that sell goods and services abroad. At the same time, energy investors on Wall Street are openly antagonistic toward Trump’s “drill, baby, drill” mantra to boost already record oil-and-gas production and to cut energy costs… [end quote]
Everyone knows that it takes time to turn a giant battleship like the U.S. economy. Even so, the stock market popped right after the election and bullish percent increased. The SPX hit a record high over 6,000 while VIX dropped. It’s in a double-top bubble based on CAPE.
Bond prices fell (yields rose). The Treasury yield curve now has a mildly positive slope. The yield curve rose along its entire length beginning in September 2024 and fell a little last week. That’s probably noise but the 10YT is near the high of October 2023 in a rough channel.
The fed funds rate is 4.25% - 4.50% and the options market doesn’t expect a drop until May. There is actually a 25% chance that the Fed may raise the fed funds rate back to its current rate in June, an indication that some speculators think inflation will increase.
During President Trump’s first term in office he brought intense pressure on the Fed to cut the fed funds rate. He will almost certainly repeat this. The Fed will be highly averse to raising rates but they will if they think inflation will rise again. I think they will be more likely to avoid cutting the fed funds rate if they think they might have to raise it later.
The Cleveland Fed’s Inflation Nowcast shows Quarterly annualized percent change of the CPI for 2025:Q1at 3.47%. This is far above the 2% goal of the Fed. CPI inflation is used to adjust the principal of TIPS. The Fed’s preferred PCE index is lower but still above their goal.
The Atlanta Fed’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2024 was 3.0 percent on January 17. This is strong but sustainable economic growth which could potentially increase inflation. The 5-year breakeven inflation rate is about 2.5% which implies that the market doesn’t believe the Fed can bring it down to 2% with current policies.
The markets are risk-on since stocks and junk bonds are rising faster than Treasuries and the USD. The Fear & Greed Index is Neutral.
Gold and natgas are rising. Oil has been in a falling trend since April 2024. “Drill, baby, drill” won’t help oil producers if the price keeps falling due to oversupply. “Dr. Copper” is steady in a channel.
The METAR for next week is sunny…maybe partly cloudy if the markets feel they have gotten ahead of themselves. I don’t see anything that will pop the bubble. Longer term…trend changes… well, the METAR is a short-term forecast.
Wendy
https://www.cnn.com/markets/fear-and-greed
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