In the above ABC interview, Professor Nouriel Roubini said it would be interesting to watch Trump deal with financial markets:
He said if Trump was “really serious” about 60 per cent tariffs on China, and 10 to 20 per cent tariffs on other trading partners, about sharply weakening the value of the US dollar, about “draconian restrictions” on migration and “mass deportation”, and about tax cuts that weren’t funded by raising other taxes or cutting spending, it could lead to situations Trump wouldn’t like.
“If he tries to follow these policies that are stagflationary, interest rates are going to be much higher, bond yields are going to be higher, the Fed will have to raise rates rather than cutting them, the stock market is going to correct,” he said.
“He cares about the bond market. He cares about the stock market. And therefore market discipline, as opposed to political discipline … [will] be the main constraint [for him].”
Long-term Treasury bonds continued their downtrend after November 5.
Ten-year yields are testing resistance at 4.5%. A breakout above 4.5% would likely cause a correction in stocks.
Fears of rising inflation are not the only factor driving Treasury yields higher. Since 2020, Treasury issuance has been skewed towards short-dated T-bills, with the issuance of notes and bonds (green) kept as low as possible to suppress long-term yields.
A study by Hudson Bay Capital concluded that rolling back the excess $1 trillion in T-bill issuance would cause a 50 basis point rise in the 10-year yield—equivalent to a 2.0% rise in the Fed funds rate—before settling at a permanent 30 basis point increase.
Also, Fed QE almost exclusively focused on purchasing notes and bonds to keep long-term yields as low as possible. Reducing the Fed’s balance sheet through QT increases the supply of notes and bonds, driving long-term yields higher.
Rising long-term yields constrain the S&P 500, which is testing support at 5850. Breach would signal a correction to 5700.
Financial Markets
Bitcoin remains above 90K, signaling strong liquidity in financial markets.
Dollar & Gold
The Dollar index retraced to test support at its rising trendline, but breakout above 107 remains a threat, offering a target of 115.
Gold rallied off support at $2,550 per ounce. Penetration of the descending trendline at $2,650 would indicate a base forming.
Silver similarly found support at $30 per ounce.
Energy
Brent crude remains in a bear market, which is likely to keep inflation in check as long as global demand remains subdued.
Base Metals
Copper also reflects weak global demand, with another likely test of support at $8,600 per tonne.
Conclusion
Donald Trump’s election campaign was based on reviving a “weak” economy, which has proved surprisingly resilient. The Fed and Treasury succeeded in taming inflation without crashing the economy—a rare feat. However, their efforts have built up imbalances in the financial system that lie in wait for the unwary.
Stimulating an economy already close to full employment will inevitably cause higher inflation, preceded by a surge in long-term Treasury yields. The result would be a sharp fall in stock prices and a likely recession.
The Republican party may control the House and the Senate, but the final guardrail is the bond market. They ignore that at their peril.
Gold and silver fell as the Dollar soared in response to higher long-term Treasury yields. But yields are rising in anticipation of rising inflation. We remain bullish on gold and retain our $3,000 per ounce target.
Acknowledgments
- Meyrick Chapman, Exorbitant Privilege: Short-Term Parking
- Hudson Bay Capital: Activist Treasury Issuance and the Tug-of-War Over Monetary Policy
- ABC: Leading economist Nouriel Roubini warns Donald Trump’s economic policies could lead to slower economic growth and inflation
- Hans Lee, Livewire: How Nouriel Roubini is thinking about markets in a ‘polycrisis’
