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Something for your Espresso – Trump will allow 2021 to unfold again!

Trump is scaling back on China tariffs, and it seems obvious now that he is working on some sort of tech deal between China and the US, which leaves his policy-mix very loose compared to initial expectations - and he is doing it while the US economy is running hot, making us wonder whether bond yields have not topped yet. 
2025-01-24

Morning from Copenhagen. 

First of all, what a week! Trump’s first week in office has not really been as anyone expected, and he has so far scaled back on China tariffs (likely in exchange for a tech deal and other trade terms), asked OPEC to lower oil prices and urged the Fed to lower interest rates, which is a clear sign that the Trump admin want the USD to weaken.

The only problem with the weakening USD thesis is that US growth continues to be exceptionally strong, and our US nowcast has shown VERY promising signs on especially growth over the past 2 months – we have to go back to 2021 to find similar levels. The momentum we are witnessing in growth in the US at the moment rhymes very well with what we saw in 2021, and with Trump potentially adding a bit of fiscal stimulus towards industrials/construction and tech, the risk/reward of reflation coming back into the market narrative looks very compelling. Especially given that we are also seeing a large discrepancy between current and future prices received in the Fed’s regional surveys for the first time ever – could be a Trump effect, but could also be a strong sign that future price outlook is on the rise.

As long as we are not seeing any signs of growth slowing, it’s really difficult for bond yields to truly change trajectory, which is why we are leaning more neutral towards the USD from a macro perspective (for now). Additionally, we don’t really want to run a lot of USD risk in FX space or US bond risk going into next week’s Fed meeting as the signs we are getting from policymakers and the economy is very mixed, as the Fed will potentially be allowed to cut rates as core prices are coming down despite the economy is running hot.

Chart 1.a: Our regime model is VERY bullish on growth

Trump is scaling back on China tariffs, and it seems obvious now that he is working on some sort of tech deal between China and the US, which leaves his policy-mix very loose compared to initial expectations – and he is doing it while the US economy is running hot, making us wonder whether bond yields have not topped yet. 

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