Markets on High Alert as Trump’s Inauguration Looms
As the first full trading week of 2025 gets underway, markets are bracing for the January 20 inauguration of Donald Trump as President. This has led to a significant surge in U.S. ‘long bond’ yields, which have reached their highest level in two years, forcing Beijing to intervene in nervy Chinese markets.
Fiscal Concerns Take Center Stage
With a new Congress convening on Friday, re-electing Republican Mike Johnson as speaker, fiscal concerns are dominating the agenda. The 30-year Treasury bond yield has breached last year’s peak, reaching 4.85%, and is now closing in on the 5% level last seen in late 2023. The yield curve gap between 2-year and 30-year bonds is at its widest in over three months.
Rising Borrowing Rates and Inflation Uncertainty
The New York Federal Reserve’s estimate of the 10-year ‘term premium’ demanded by investors to hold longer-term debt to maturity is at its highest since 2015. This reflects growing concerns about the fiscal impact of tax cuts and long-term inflation uncertainty. The brisk growth and relatively hawkish Fed picture are also contributing to the rise in borrowing rates.
Labor Market Updates and Economic Surprise Index
A big week of labor market updates is ahead, culminating in an expected 150,000 rise in national payrolls in Friday’s employment report. The U.S. economic surprise index has returned to positive territory after a brief dip last week. Adding to inflation anxiety is the return of U.S. crude oil prices to their highest since October.
Fed Thinking and Interest Rate Cuts
Fed futures show markets are even more hawkish than the central bank, which recently indicated just two interest rate cuts this year. San Francisco Fed boss Mary Daly and Fed governor Adriana Kugler have emphasized that the job is not yet done on reining in inflation.
Stock Market and Dollar Performance
U.S. stocks regained their poise on Friday after a bumpy couple of holiday-strewn weeks. Wall Street stock futures were up again ahead of Monday’s bell, with one eye on the imminent fourth-quarter earnings season. The dollar has dialled back a bit on Monday, after sailing to two-year highs last week on interest rate expectations and speculation about trade tariffs from the incoming Trump administration.
China’s Currency and Stock Market Concerns
Chinese officials are scrambling to steady the yuan, which has plumbed 16-month lows and threatened pivotal historical levels around 7.35 per dollar. China’s stock exchanges and central bank are defending the currency and shoring up a stock market relapse that has seen the mainland Chinese stock index lose more than 5% last week.
Global Market Developments
The Canadian dollar was calm after reports Prime Minister Justin Trudeau is increasingly likely to announce his departure. The latest data showed China’s services activity expanded at the fastest pace in seven months in December, driven by a surge in domestic demand. However, orders from abroad declined, reflecting growing trade risks.
Key Developments Ahead
Later on Monday, markets will be watching for final U.S. December business survey readings from S&P Global, November factory goods orders, and a speech by Federal Reserve Board Governor Lisa Cook. The US Treasury will also sell 3 and 6-month bills.
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