- The Trump trade lost steam this week as market participants returned their focus to US monetary policy.
- The core PCE price index showed inflation increasing by 0.3% as expected.
- Trump nominated Scott Bessent as the new Treasury Secretary.
Interest futures had a strong rally this week as the Trump trade faded and data solidified bets for a December Fed rate cut. Meanwhile, Treasury yields and the US dollar eased from their peaks amid thin holiday trading on Thursday and Friday.
The dollar and Treasury yields have rallied in November after Trump won the election and changed the outlook for the US economy. However, the Trump trade lost steam this week as market participants returned their focus to monetary policy and the Fed’s rate cut outlook. Although the outlook for 2025 has shifted to a gradual pace for cuts, in the near term, policymakers might vote to lower borrowing costs in December.
Last week, US business activity data came in higher-than-expected, showing robust demand and boosting the dollar. However, this week, data has mostly come in line with expectations, increasing the likelihood of a rate cut in December.
The GDP report on Wednesday revealed that the economy expanded by 2.8% in the fourth quarter, meeting forecasts. The steady growth mirrored the third quarter, when the economy also expanded by 2.8%. Economists had expected this figure. No surprises means that the Fed has already anticipated such an outcome.
Meanwhile, the core PCE price index showed inflation increasing by 0.3% on a monthly basis as expected. As a result, markets gained confidence in a December Fed rate cut, boosting interest futures.
However, the outlook for 2025 is bleak. Inflation has paused its decline, and the economy might reheat under Trump’s administration. Therefore, the US central bank might prefer to keep interest rates at a restrictive level. Experts believe the Fed might pause in January and March. Such an outcome would be bearish for interest futures.
Elsewhere, investors are keeping an eye on Trump’s moves before he takes office in January. On Tuesday, Trump nominated Scott Bessent as the new Treasury Secretary. The move briefly boosted Treasury yields as he is a supporter of Trump’s tariff policies. However, the move later reversed. Meanwhile, Trump vowed to impose tariffs on Mexico, Canada, and China, briefly supporting the dollar. However, analysts noted that these countries might escape the tariffs through better trade negotiations.
