The Synopsis 02Feb2025
A weekly column of my macro thoughts.
The FOMC, as expected, did not change interest rates, with Chairman Powell maintaining a dovish stance, emphasizing confidence in inflation reaching 2% medium-term without further policy adjustments. The ECB also followed expectations by cutting rates and signaling continued dovishness amidst stagnant EU growth.
The biggest development was Trump’s surprise announcement of 25% tariffs on Mexico and Canada, along with a 10% across-the-board tariff on China, signaling a disruptive shift in trade policy. Markets have yet to fully price in these moves, which could lead to inflationary pressures via higher prices and potential retaliation. However, the inflationary impact is likely a one-time adjustment rather than a persistent increase. The immediate effect on growth, due to higher costs for consumers, is expected to be negative, and market volatility is anticipated as a result.
Attention now turns to the Quarterly Refunding Announcement (QRA), where the Treasury’s debt issuance strategy will be revealed. If the new administration moves toward increasing longer-term bond issuance (coupons) instead of relying on short-term debt (bills), it could cause a steepening of the yield curve and additional pressure on equities. Given that a market rally began in late 2023 when the Treasury opted for minimal coupon issuance, reversing this decision could lead to a sharp correction, potentially 5-10% in equities.
The broader question is whether the administration will enact all disruptive policies at once—tariffs, deficit reduction, and Treasury issuance changes—or spread them out. A concentrated approach could create a market bottom sooner, whereas a staggered rollout might lead to prolonged uncertainty. Given these risks, the recommendation is to reduce equity exposure rather than add risk at current levels.
In summary, markets face significant uncertainties with upcoming policy shifts, and risk management remains the priority until further clarity emerges.
Trade/investment ideas for next week:
Buy Schatz and Bobl
Buy put spreads in SPX
Hide in STIP for a while until further clarity emerges