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Week Ahead: Trump's Return, Central Bank Decisions, and Trade Policy Fears Dominate

Updated: Jan 24

Markets are on edge as Trump's second presidential inauguration takes place today. Recent U.S. data showed easing price pressures, strengthening Fed rate cut expectations. However, Trump's proposed tariffs, tax policies, and immigration stance are raising inflation concerns. Gold prices surge on tariff worries, while oil markets remain volatile amid sanctions on Russia and potential policy shifts.


Key Events and Data to Watch This Week (January 20, 2025)


Monday

  • China: PBoC Interest Rate Decision (09:15)

  • Germany: Producer Price Index (Dec) (15:00)

  • US: Presidential Inauguration (21:00)


Tuesday

  • UK: Average Earnings Excluding Bonus (Nov) (15:00)

  • UK: Claimant Count Change (Dec) (15:00)

  • UK: Employment Change (Nov) (15:00)

  • Canada: Consumer Price Index (Dec) (21:30)


Thursday

  • Canada: Retail Sales (Nov) (21:30)

  • Eurozone: Consumer Confidence (Jan) Preliminary (23:00)


Friday

  • Australia: Judo Bank Composite PMI (Jan) Preliminary (06:00)

  • Japan: National Consumer Price Index (Dec) (07:30)

  • UK: GfK Consumer Confidence (Jan) (08:00)

  • Japan: BoJ Interest Rate Decision (11:00)

  • Eurozone: HCOB Composite PMI (Jan) Preliminary (17:00)

  • UK: S&P Global/CIPS Composite PMI (Jan) Preliminary (17:30)

  • US: S&P Global Composite PMI (Jan) Preliminary (22:45)

  • US: Existing Home Sales Change (Dec) (23:00)

  • US: Consumer Sentiment Index (Jan) (23:00)

  • US: Consumer Inflation Expectation (Jan) (23:00)


Markets Brace for Trump's Second Term: Economic and Market Outlook


Last week, data from the U.S. indicated that price pressures eased for the first time in six months, driven by cheaper hotel stays, lower medical care costs, and relatively moderate rent increases. This development slightly strengthened bets on Federal Reserve rate cuts. However, for now, markets remain focused on Donald Trump's second presidential inauguration, set to take place later today.


Following inflation figures that rose less than expected in December, the deep selloff in the bond market paused, and bets on the Fed cutting rates sooner than previously anticipated increased. Prior to the data release, bond traders had priced in only one quarter-point rate cut this year, but now they see a 50% chance of a second cut. However, some traders remain unconvinced.


According to a Bloomberg Intelligence analysis as of last Friday's market close, rate option investors currently assign about a 25% chance that the Fed's next move will be a rate hike. These bets had stood at 30% before the inflation data but marked a significant increase from the 0% probability seen before last week's labor market data. Prior to the labor report, 40% of traders expected a pause, while 60% foresaw only one cut.


week-ahead-trump-return-central-bank-decisions-and-trade-policy-fears-dominate

During the press conference following the December policy decision, Fed Chair Jerome Powell was asked whether the possibility of a rate hike this year had been entirely ruled out, given the stickiness of inflation. He responded, "You don't rule things completely in or out in this --- in this world," but added that any hike "doesn't appear to be a likely outcome."


Since then, several Fed officials have maintained a cautious stance, stating that rate cuts would only be reconsidered after further progress toward the 2% inflation target. However, none have hinted at a potential hike. Nonetheless, alongside bond traders, some economists are beginning to highlight the possibility of rate hikes in the coming months should there be significant inflation surprises.


Former New York Fed economist Phil Suttle has stated that he expects the Fed to raise rates in September. Vanguard economist Roger Hallam also pointed out the potential for such a scenario, contingent on inflation data.


Bets on rate hikes are largely grounded in expectations that Trump's tariff, tax, and immigration policies will drive up inflation. The pace and specifics of Trump's policies remain unclear at this point. Today, as he assumes office, his policies are expected to gradually become more defined. However, for now, the bar for the Fed to consider a rate hike appears to be quite high. Still, these expectations are worth noting, given their potential impact on market pricing.


Currency traders have increased their bets on a stronger dollar just before Trump's second term begins. Data published by Bloomberg on Friday showed that as of January 14, net long positions in the dollar rose by $1 billion from the previous week, reaching $34.6 billion—the highest level since 2019.


Meanwhile, forecasts for U.S. Treasury yields are also rising this year. Nomura Holdings Inc. has joined T. Rowe Price as the second firm to highlight the chance of 10-year benchmark yields climbing to 6%. In a note published on Friday, Nomura economists wrote that yields remain relatively low given inflation and fiscal balance concerns.


Despite the latest inflation report slightly easing expectations, worries about fiscal pressures continue to keep Treasury yields elevated. Projections from the Congressional Budget Office (CBO) published on Friday indicate that the fiscal deficit is on track to surpass record debt levels set after World War II within four years.


Moreover, the CBO's forecast does not account for revenue losses stemming from new tax cut plans proposed by the Trump administration. Therefore, unless the administration pivots away from its current policy rhetoric, any statements or actions reinforcing expectations of higher inflation and fiscal deficits are likely to push U.S. Treasury yields and the dollar further upward.


Market Turmoil: Precious Metals Surge on Tariff Concerns


Gold prices, which pulled back slightly after last week's rally fueled by U.S. inflation figures rising less than expected and boosting bets on Fed rate cuts, began the new week with another upward move, just hours before Trump's inauguration ceremony.

Trump's rhetoric about imposing tariffs of up to 20% on goods from all countries has intensified turbulence in the gold market ahead of his assumption of office.


In London, gold lease rates skyrocketed to historic levels, exceeding an annual rate of 3.5%. This reflects major sellers' efforts to ship physical gold to the U.S. before any tariffs are implemented.


The spike in London lease rates indicates heightened demand for gold and a supply crunch in the market. Normally close to zero, the sharp increase in lease rates serves as evidence of this scarcity. A similar situation is also evident in the silver market.


JPMorgan, the world's largest bullion dealer, reported that gold and silver, as monetary metals, are likely to be exempt from tariffs. However, the current shortage of bullion could still create upward pressure on prices.


Some industry experts foresee a potential silver supply squeeze as well. TD Securities strategist Daniel Ghali noted that the depletion of London vault stocks is accelerating and predicted that silver prices could average $38 per ounce by year-end.


On the other hand, the outlook for precious metals will largely depend on Trump's policies. If, as JPMorgan anticipates, these precious metals are exempted from tariffs or if policies that boost U.S. inflation and prompt the Fed to adopt a more hawkish stance are implemented, pressure on precious metals could increase further.


Oil Traders Brace for Trump's Impact on Supply and Trade


Following U.S. sanctions on Russian oil, crude prices, which had climbed above $80 per barrel, eased to stabilize around $77 amid the uncertainty dominating markets ahead of Trump's inauguration.


Oil traders are closely watching the steps Trump will take after assuming office, particularly given his campaign promises to boost domestic production. Increased production signals higher supply, but Trump has also threatened heavy tariffs on major oil suppliers like Canada and Mexico and hinted at sanctions on Iran.


Additionally, the imposition of the boldest sanctions yet on Russia has led oil traders to increase their long positions.


Trump's potential policies and supply concerns are exerting upward pressure on oil prices. On the other hand, concerns over Chinese demand persist, while the recent ceasefire in Gaza has alleviated regional supply fears. This could limit the upward momentum in oil prices.

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