President Trump's plan to lower interest rates is through lower oil prices, which would likely push inflation close enough to target for more cuts. Trump is making efforts to lower oil prices through increased drilling and negotiations with OPEC, and is linking lower energy prices to an explicit demand for lower interest rates. Lower energy prices would directly lower headline inflation and marginally lower core inflation over several quarters. In addition, lower energy prices would […]
Trump's trade war can be surprisingly aggressive because it will underwritten by a Fed with plenty of room to cut. The market seems to perceive tariffs as largely a negotiating tool, but there is increasing indication that they will be deployed regardless of the outcome of negotiations. Tariffs will need to be high and broad in order to fundamentally reshape the global economy and raise tax revenue. Similar to the first trade war, the financial […]
The relentless rise in yields is likely peaking for the cycle because the current level of yields is slowing the economy enough to make further increases unsustainable. The recent rise in yields largely reflects an upward shift in expected Fed policy due to hawkish Fed communication and stronger than expected economic data. At near 5%, the 10 year yield is clearly putting downward pressure on economic activity through its impact on interest rate sensitive sectors, […]
A more balanced U.S. trade relationship would structurally reduce the flow of dollars abroad, which would in turn reduce the demand for certain U.S. assets. Overseas investors hold enormous amounts of U.S. assets that are in part financed by tens of trillions of dollars earned through trade. While it is not possible to trace the precise flow of dollar financing, aggregate data suggests they tend to reinvest their dollars into U.S. fixed income securities. In […]
President Trump's incoming economic team is sketching out a path to a global economic order that will be radically different from before. A key goal of the team is to create jobs and ensure supply chain security by revitalizing American manufacturing. The team attributes the decline of U.S. manufacturing to an overvalued dollar, but is not looking to use FX intervention as its primary tool. Instead they prefer to negotiate with other nations by offering […]
Markets look to be much more turbulent next year as a likely dovish shift in market pricing would paradoxically lead to a decline in risk assets. The market's current pricing of just two cuts next year looks highly unlikely amidst the Fed's clear emphasis on employment and the potential for significant trade disruption. A more aggressively dovish path of policy would lead to a weaker dollar, which has remained strong largely on account of higher […]
