On his first day in office, President Trump issued a series of
executive orders, signaling his intent to deliver on campaign
promises. Our Global Head of Fixed Income and Public Strategy
Michael Zezas takes a closer look at economic impacts of Trump’s
proposed policy path.
----- Transcript -----
Welcome to Thoughts on the Market. I’m Michael Zezas, Global Head
of Fixed Income and Public Policy Strategy. On this episode of
the podcast, we’ll discuss how trade policy uncertainty is
creating volatility in markets.
It’s Wednesday, January 22nd, at 10am in New York.
Earlier this week, Donald Trump was again inaugurated as
President of the United States. In the days that have followed,
we’ve fielded tons of questions from investors, who are trying to
parse the meaning of myriad executive orders and answers to press
questions – looking through that noise for signals about the if,
when, and how of policy changes around tariffs, taxes, and
more. This effort is understandable because – as we’ve
discussed here many times – the US public policy path will have
substantial effects on the outlook for the global economy and
markets.
And while we’ve spent some time here explaining our assumptions
for the US policy path, it's important for investors to
understand this. Even if you correctly forecast the timing and
severity of changes to trade, tax, immigration, and other
policies, you shouldn’t expect markets to consistently track this
path along the way. That’s because there’s bound to be a fair
amount of confusion among investors, as President Trump and his
political allies publicly speculate on their policy tactics and
make a wide variety of outcomes seem plausible.
Take tariff policy for example. On Monday, the President
announced an America First Trade Policy, where the whole of
government was instructed to come up with policy solutions to
reduce goods trade deficits and related economic and national
security concerns. Tariffs were cited as a tool to be used in
furtherance of these goals, and instructions were given to
develop authorities on a range of regional and product-specific
tariff options. Said more simply, while new tariffs were not
immediately implemented, the President appears to be maximizing
his optionality to levy tariffs when and how he wants. That will
mean that all public comments about tariffs and deadlines,
including Trump’s comments to reporters on tariffs for Mexico,
Canada, and China, must be taken seriously – even if they don’t
ultimately come to fruition, which currently we don’t think they
will for Mexico and Canada.
For markets, that max optionality can drive all sorts of short
term outcomes. In the US Treasury market, for example, our
economists believe these tariffs and a variety of other factors
ultimately make for slower economic growth in 2026; and so we
expect Treasury yields will ultimately end the year lower. But
along the way they could certainly move higher first. As my
colleague Matt Hornbach points out, tariff threats can drive
investor concerns about temporary inflation leading markets to
price in a slower pace of Fed interest rate cuts, which helps
push short maturity yields higher.
So bottom line: investors should be carefully considering US
public policy choices when thinking about the medium term
direction of markets. But they should also expect considerable
volatility along the way, because the short term path can look a
lot different from the ultimate destination.
Thanks for listening. If you enjoy the show, please leave us a
review wherever you listen and share Thoughts on the Market with
a friend or colleague today.
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