Trump has said he wants a weaker dollar but the consensus is that his policies will push up inflation
Earlier this week I wrote about whether there really are such things as Trump trades. There are many steps between Trump and a market outcome: 1) electoral victory 2) ability to push measures through Congress 3) what policies he prioritizes 4) the expected impact playing out, which is also tied to the broader market set-up.
One example is the dollar. Trump has said he wants a weaker dollar but the consensus is that his policies will push up inflation, interest rates and hence the dollar. Another example is bond yields. Based on the market reaction after the first debate and the assassination attempt on him, you could argue the curve steepener trade is probably most directly tied to Trump's odds. Again, the argument here is his tax cuts and fiscal expansion will push up long-end yields. But Alpine Macro's Chen Zhao makes the point that that might be offset by the effect of higher tariffs, which are actually deflationary because they squeeze people's incomes.
There's also the fact that Trump, if he wins, is going to inherit a softening economy and the potential start of an easing cycle. At the start of the his first term, the Fed was raising rates.
There's generally more consensus on what sectors will benefit under Trump, such as banks and oil companies. But these are also cyclical sectors that will be affected by the macro backdrop. And even there the translation from Trump love to outperformance is uncertain. He might be more supportive of oil, but will that just increase supply and hurt oil prices anyway?
What seems to be happening is that the so-called Trump trades playing out all had other catalysts -- mostly expectations for a Fed rate cut, which also has the effect of steepening the yield curve and fueling a rotation into small-caps. So politics are fun to talk about if you're bored of the Fed, but it's still mostly the Fed.
On the rotation, there have been two interesting developments this week: 1) disappointment with some of the tech mega-caps like Alphabet 2) yesterday's US GDP numbers. The latter were stronger than expected, but didn't really hurt optimism for the September rate cut. So not only did the smaller stocks continue catching up, value stocks also outperformed and low-volatility stocks underperformed. So it was total risk-on.
There have been some recent signs the US consumer might be starting to crack. Data on new home sales disappointed. Companies like Whirlpool, PepsiCo., Delta Air Lines and more have indicated demand is slowing. But nothing is terrible just yet.
One example is the dollar. Trump has said he wants a weaker dollar but the consensus is that his policies will push up inflation, interest rates and hence the dollar. Another example is bond yields. Based on the market reaction after the first debate and the assassination attempt on him, you could argue the curve steepener trade is probably most directly tied to Trump's odds. Again, the argument here is his tax cuts and fiscal expansion will push up long-end yields. But Alpine Macro's Chen Zhao makes the point that that might be offset by the effect of higher tariffs, which are actually deflationary because they squeeze people's incomes.
There's also the fact that Trump, if he wins, is going to inherit a softening economy and the potential start of an easing cycle. At the start of the his first term, the Fed was raising rates.
There's generally more consensus on what sectors will benefit under Trump, such as banks and oil companies. But these are also cyclical sectors that will be affected by the macro backdrop. And even there the translation from Trump love to outperformance is uncertain. He might be more supportive of oil, but will that just increase supply and hurt oil prices anyway?
What seems to be happening is that the so-called Trump trades playing out all had other catalysts -- mostly expectations for a Fed rate cut, which also has the effect of steepening the yield curve and fueling a rotation into small-caps. So politics are fun to talk about if you're bored of the Fed, but it's still mostly the Fed.
On the rotation, there have been two interesting developments this week: 1) disappointment with some of the tech mega-caps like Alphabet 2) yesterday's US GDP numbers. The latter were stronger than expected, but didn't really hurt optimism for the September rate cut. So not only did the smaller stocks continue catching up, value stocks also outperformed and low-volatility stocks underperformed. So it was total risk-on.
There have been some recent signs the US consumer might be starting to crack. Data on new home sales disappointed. Companies like Whirlpool, PepsiCo., Delta Air Lines and more have indicated demand is slowing. But nothing is terrible just yet.
Justina Lee is a cross-asset reporter based in London. Follow Bloomberg's Justina Lee on X @Justinaknope.
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