- Investors continued pricing in Trump’s policy proposals this week.
- Powell said there was no need to rush lowering interest rates.
- Data on Friday revealed that US retail sales increased by 0.4%, bigger than the forecast of 0.3%.
Interest futures eased on Friday, heading for a bearish week where Treasury yields and the dollar soared. The Trump trade continued boosting Treasury yields due to the prospects of robust growth and high inflation. At the same time, hawkish Fed remarks lowered the likelihood of a rate cut in December.
10-year US Treasury yield (Source: Bloomberg)
Investors continued pricing in Trump’s policy proposals this week, sending yields higher and interest futures down. Some significant policy changes that will impact the US economy include tax cuts and import tariffs. Trump believes the US corporate tax should be lowered to boost employment and the economy. At the same time, import tariffs will increase demand for local products, boosting the local economy. However, the tariffs will also increase consumer prices, driving inflation higher.
The Fed has struggled to lower sky-high inflation and is nearly achieving its target. As a result, policymakers voted to start lowering borrowing costs in September. However, if Trump’s policies reheat the economy, the Fed might be forced to keep rates at restrictive levels. As a result, Treasury yields have soared, putting downward pressure on interest futures.
Furthermore, Trump’s presidency has increased risk appetite, with investors preferring to buy equities instead of bonds.
Meanwhile, US inflation data this week revealed that price pressures were trending as expected. The CPI increased by 0.2% in October and 2.6% annually. Therefore, it solidified bets for a December Fed rate cut. However, market participants slashed these bets after Powell’s hawkish speech on Thursday. The US central bank Chair said there was no need to rush lowering interest rates.
Moreover, he noted that the economy remained resilient and the labor market was robust. His remarks showed caution that could mean fewer rate cuts next year. After his speech, traders were pricing a 48.3% chance of a rate cut in December. Meanwhile, the Fed might only lower rates by 71 bps in 2025. A gradual pace is bearish for interest futures and could keep prices down.
Elsewhere, data on Friday revealed that US retail sales increased by 0.4%, bigger than the forecast of 0.3%. The jump is a clear indication that consumer spending remains robust. However, core retail sales increased by 0.1%, missing estimates of 0.3%.
