How markets might be wrong about Trump

Good morning. Kazakhstan overshot its Opec+ oil output limits, yet again. To what extent is Opec+’s poor organisation responsible for this year’s cheap oil prices? If Saudi Arabia gets tired of corralling its unruly bloc and abandons output caps altogether, will we have bad management to thank for cheap oil next year?

A quick plug: our colleagues will be hosting a Q&A at 10am Eastern/3pm UK time on how global trade and markets will be affected by a Trump presidency. Follow along at the bottom of this article. We hope you go, and email us: [email protected] and [email protected].

Contrarian views on Trump and markets

The consensus view of what Trump means for markets is too easy, smells of political bias and reads too much into the recent rally. It may be right, but we should be alert to the possibility it isn’t.

The consensus is that Trump means higher growth, higher deficits, higher inflation, higher stock prices and higher bond yields. Natural Trump haters, like the 23 Nobel Laureates in economics who signed a letter endorsing Kamala Harris’s policies over Trump’s, emphasise the deficit and inflation side. Trump lovers emphasise the growth side. Scott Bessent, angling for a big job in the administration, argued in The Wall Street Journal that the election market rally proved the growth interpretation correct — clearing the way for critics to use his own words to argue that the next big correction will be Trump’s fault, which it almost certainly won’t be. Both sides of the consensus could be wrong.  

Chris Verrone, a strategist at Strategas, argues that the “higher rates” bit of consensus has been overstated, and that the increase in yields we have seen in recent months can be attributed to better economic data lifting growth expectations. Cyclical stocks have done well, and the rise in yields tracks the Citi economic surprise index:

Matt Klein of The Overshoot argues that policymakers may learn the wrong lessons from the presidential election. As a result, fiscal policy will be less accommodative in future downturns, increasing economic risks and making Treasuries a more appealing hedge. More hedging with Treasuries means lower yields, all else equal.

Prior to the pandemic, a consensus had begun to develop that the US and other major economies consistently left money on the table by failing to run macro policy hot enough, both in normal times and in response to downturns . . . The virus gave policymakers a chance to test these new ideas. I believe that the result was an astounding success. Employment recovered faster than in any prior downturn, while inflation-adjusted US consumer spending per person grew faster in 2019Q4-2024Q3 than it did in 2015-2019 . . . the US outperformed every other major economy relative to pre-pandemic expectations, likely because those societies did not match America’s macro policy stance.

This will not be the takeaway for politicians, however. We can debate how much of the post-pandemic inflation can be attributed to Biden’s fiscal policies; we can also debate whether or not people would have liked a bigger downturn with high unemployment any better than they liked inflation. But the electoral lesson that everyone seems to be taking away from last week is that inflation is a policy choice, and one that is electorally radioactive. But if fiscal policy is timid in downturns, the downturns will be worse, Klein argues. In that world, it will make more sense to own more bonds, which perform well when risk assets do not. Such a portfolio shift will not play out quickly, of course.

Joseph Wang of Monetary Macro argues that Trump’s tariff policy could be bad for stocks. This argument is common enough, but is generally framed in terms of economic friction. Wang says it is more a matter of how corporate value added is shared between corporations and workers:

The shocking annual $1tn trade deficit in goods appears to suggest that foreign companies are completely dominating the trade with the US. But in fact much of the goods imported into the US are sold by US companies who decided to manufacture abroad . . . Trump’s efforts to encourage companies to make in America can be seen as a struggle for American companies to share more profits with American workers.

Reshoring, which tariffs hope to incentivise, means higher labour costs. If companies pass the higher costs on to consumers, the tariffs will be inflationary, too. But it doesn’t have to play out that way. If demand proves inelastic, the higher costs will have to come out of profits, so the effect will be redistribution rather than inflation. Wang notes that the first Trump administration caused little reshoring and a lot of rerouting of trade, but it may design smarter tariffs this time.

Unhedged’s view is that because policy takes time to make, and because the market’s visibility on the effects of Trump policy is limited, it will take some time to see a true Trump effect in markets. Next year may simply see current trends continue. But 2026 is certain to be interesting. 

CPI

The October CPI report was a mixed bag. Headline inflation ticked up to 2.6 per cent, above September’s 2.4 per cent. Not great — but a move that was in line with economists’ expectations.

Core CPI, which strips out volatile food and energy, had a smaller move: up 3.3 per cent from last October, just above September’s reading of 3.25. But Unhedged’s preferred measure, annualised month-to-month change in core inflation, was down a touch:

The rolling three-month average was up a hair — an unpleasant reminder that core CPI has been above 3.4 per cent for the past three months, in contrast to the 2 per cent or lower readings we got from May to July. Did we never actually beat inflation?

After falling sharply in September, shelter inflation ticked up again and was called out by the Bureau of Labor Statistics’ report for “accounting for over half of the monthly all items increase”. But that may have been down to quirks in the data. According to our frequent correspondent Omair Sharif at Inflation Insights, in April there was a very low shelter price reading in the Midwest; since rent and owner-equivalent rent are calculated on a six-month basis, the anomalous low reading resulted in this month’s data being unusually high in comparison. “Overall, there was little underlying change in the pace of rent and owner-equivalent rent” this month, said Sharif.

Services and the Atlanta Fed’s sticky price index remain elevated but were flat or down from the prior month. Not great, but also not terrible.

This column has long argued that the path down to the Fed’s target would be long and winding (Unhedged maintains that Paul McCartney would have made a fine economic journalist), and that the Fed would not be deterred from its rate-cutting path by bumpy inflation data alone. It seems that the market is starting to hold this view, too. Bets on a 25 basis point cut went up a little after the CPI news, and yields were unchanged.

Yet, in confidently expecting a cut, we cannot help but feel like the market is talking out of both sides of its mouth. The jump in yields and inflation break-evens in the run-up to the election and in its aftermath reflects expectations that inflation may persist. The Bank of America global fund managers survey, out yesterday, found that more investors forecasted higher inflation in the next 12 months than not for the first time in three years — though we should note that 22 per cent of respondents gave their answers after the election. 

This is a bit incongruous. But, as we said in the first piece, until we have a more clear read on Trump’s fiscal policies, incongruity is the order of the day.

(Reiter)

One good read

Venom.

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