29 November 2024 - Markets are on edge as President-elect Trump rattles trade relations with Mexico and Canada, while U.S. economic data shows robust 2.8% growth alongside persistent inflation concerns. Will Trump's tariff threats reshape North American trade, or is it just another negotiation tactic?
Trump’s Trade Threats, Inflation Data, and Fed Caution Create a Perfect Storm for Markets
This week, traders recalibrated their expectations regarding the Federal Reserve’s policy easing path in light of a busy flow of data from the U.S.
The U.S. economy continues to grow at a solid pace, with the labor market remaining healthy even if it cools down, and the stickiness of price pressures raises questions about the progress of inflation toward the target rate. When these data are considered alongside the Fed policymakers' recent cautious statements, they justify expectations for fewer rate cuts in the coming year.
According to data published by the U.S. Bureau of Economic Analysis (BEA), the U.S. economy grew by 2.8% in the third quarter, while the Fed’s preferred inflation gauge accelerated.
The Personal Consumption Expenditures (PCE) Price Index for October increased by 2.3% year-on-year across all items. Excluding volatile food and energy costs, the so-called core PCE rose to 2.8%. Food prices increased by 1% year-on-year, while the main driver of differentiation was the 5.9% decline in energy prices.
Meanwhile, even before officially taking over the White House, President-elect Donald Trump has begun shaping the political agenda, and his political stance is fueling concerns about U.S. inflation. On Monday, Trump threatened in a social media post to impose a 25% tariff on all goods coming from Mexico and Canada. These goods include energy commodities, which have recently contributed significantly to easing U.S. inflation.
Mexico and Canada together supply 7 out of every 10 barrels of oil imported by the U.S. Many industry officials warn that if Trump enforces such tariffs, energy costs for American consumers will rise, which would translate to higher U.S. inflation.
On the other hand, several market observers, including Goldman Sachs, suggest that Trump’s threat might be merely a negotiating tactic. Considering his pre-election promises to reduce energy costs, they find it unlikely that these tariffs will actually be implemented.
Indeed, on Thursday, Trump announced in a social media post that he had a productive meeting with Mexican President Claudia Sheinbaum. He claimed that Sheinbaum had agreed to stop migration and effectively close the southern border. However, in a message shared from her own account, Sheinbaum stated that her stance was not about closing borders but about building bridges between governments and people.
Following Trump’s message, market tensions eased slightly, though the possibility of such tariffs remains on the table, continuing to create uncertainty.
Bloomberg’s U.S. Dollar Index has fallen by approximately 1.1% since the beginning of the week. Economists speculate that traders outside the U.S. may be selling dollars to rebalance their portfolios ahead of the Thanksgiving holiday. The dollar’s direction will likely become clearer once Trump assumes office in late January and unveils his policies. Until then, volatility is expected to persist.
Volatility Ahead: Key Factors Driving Gold Prices in a Complex Global Landscape
Gold prices, which have been seeking direction amid expectations for the Fed's policy path and geopolitical risks, have dropped approximately 2% since the beginning of the week but continue to recover some of these losses.
The 60-day ceasefire agreement between Israel and Hezbollah has slightly dampened safe-haven demand. However, concerns over the escalation of the conflict between Ukraine and Russia persist, limiting the downside movement in gold.
Meanwhile, traders are assessing the potential economic impacts of the policies expected to be implemented by Donald Trump, as well as concerns surrounding U.S. inflation. On one hand, higher inflation could narrow the Fed’s room for rate cuts, but lower real yields would be favorable for gold. On the other hand, rising political uncertainty may further support safe-haven demand.
In addition, central banks continue to bolster their gold reserves as a shield against potential external shocks arising from trade wars and ongoing geopolitical risks. This is a significant driving force for gold prices.
As a result, if the pullback in the dollar observed this week continues, upward momentum in gold prices is likely to gain strength. However, given the complex global agenda, volatility is expected to persist until there is greater clarity on certain issues.
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