A Taste Of What The Next Four Years May Hold

WHERE WE STAND – Welcome to 4 more years of policy volatility.

Participants were handed a reminder of just how uncertain and choppy the first days of a Trump Administration are likely to be yesterday, with trade policy in the limelight once more.

Initially, it appeared that the self-proclaimed tariff man’s bark might well prove to be worse than his bite. On the campaign trail, Trump had previously touted the potential for universal tariffs of up to 20% on US imports from any country, in addition to additional tariffs that would be levied on certain nations, such as Mexico and China. Reports yesterday, via the Washington Post, indicated that said plan could well be watered down, with Trump’s team said to be fleshing out the tariff plan, with a focus on “critical imports”, such as the industrial supply chain, medical supplies, and energy production.

Mere hours later, Trump – via a social media post – refuted the story, branding it “fake news”, and claiming that WaPo’s anonymous sources did not in fact exist.

Nevertheless, this pushback came after we received a glimpse of how participants may be preparing to trade the tariff story. In reaction to the initial reporting, stocks rallied, Treasuries gained across the curve, while the dollar sold off, with the DXY trading to one-week lows.

These moves seemed a combination of ‘worse case scenario’ hedges being unwound, in addition to participants pricing out a chunk of upside inflation, and downside growth risks. A more dovish policy outlook was subsequently, and briefly, also priced in, with the USD OIS curve at one stage discounting around 45bp of easing by year-end, compared to 39bp on Friday, before the move pared.

This paring of dovish policy expectations was mirrored by market moves elsewhere, as news of Trump’s pushback on the initial headlines broke. Consequently, the dollar ended the day marginally softer, albeit with the DXY managing to clamber back above the 108 figure, with the persistent weakness likely a result of stretched long positioning being somewhat squeezed, while positions were likely also squared up ahead of a busy week of economic releases.

Treasuries, meanwhile, ended the day softer across the curve, with weakness led by the long-end, as benchmark 30-year yields rose to their highest since November 2023, close to 4.85% - rates & FX moving in opposite directions is another sign that it is flows and positioning in the driving seat here. Stocks, in contrast, ended in the green, though both the S&P 500 and Nasdaq 100 closed some way off their intraday bests.

At risk of over-extrapolating one day’s price action, it does feel like this could well set the tone for the year ahead – plenty of conflicting ‘sources’ reporting, with a ton of Trump social media posts in the mix as well, all creating a messy backdrop for traders to operate in.

Buying vol, and remaining nimble, seem like the best strategies for now, while days like yesterday only help to reinforce the idea that participants will seek to de-risk and trim exposures in the run up to inauguration day on 20^th January.

Politics was also in focus north of the US border, with Canadian PM Trudeau succumbing to the inevitable and announcing his resignation, though he will stay on until a successor is found. This news was greeted with the loonie rallying over 1% intraday, as USD/CAD briefly traded below the 1.43 figure for the first time in three weeks – not exactly the farewell present Trudeau had in mind, I imagine. We await news on his successor, though I’m sure the ‘unreliable boyfriend’ himself, Mark Carney, of BoE and BoC fame, is waiting in the wings with baited breath.

Elsewhere, the final read on December’s eurozone services PMI survey surprised to the upside, with the print nudged higher to 51.6, from the flash estimate of 51.4. A modest revision, yes, but another data point that helps to feed into the idea that ‘peak pessimism’ could be close for the common currency, and which helped to nudge Citi’s eurozone economic surprise index back towards the Plimsoll line.

LOOK AHEAD – A busy day awaits as the first full trading week of the year continues.

Focus, initially, will fall on this morning’s eurozone inflation metrics, where headline prices are set to have risen by 2.4% YoY in December, 0.2pp quicker than in December, albeit with core CPI set to have held steady at 2.7% YoY. Despite this lack of further disinflationary progress, the figures are unlikely to deter the ECB from another 25bp cut at the end of this month, as policymakers increasingly focus on downside growth risks. In any case, the EUR OIS curve fully discounts a 25bp cut at the January meeting, with a total of 104bp of easing priced by the end of the year.

Meanwhile, stateside, a couple of interesting releases await. December’s ISM services PMI print is the highlight, with the index set to tick higher to 53.5, from a prior 52.1. Focus will, of course, also fall on the prices paid sub-index, as well as the employment component, ahead of Friday’s labour market report. Speaking of jobs, the November JOLTS job openings figure is due, with the survey set to point to 7.75mln openings that month, broadly unchanged from the prior print.

10-year supply is also due from the States today, after yesterday’s 3-year auction delivered a disappointing 1.2bp tail, in a week that brings over $100bln of supply in total, with a 30-year sale due tomorrow. Finally, 2027 Fed voter Barkin is due to speak, though the remarks are unlikely to be market-moving in nature.