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The excitement surrounding the nomination of Wall Street’s trusted Scott Bessent (Key Square gal) to be the Trump administration’s Treasury secretary quickly cooled. This is because last night, President-elect Donald Trump said, “As soon as I take office, I will impose tariffs on China, Canada, and Mexico.” This reminded investors ‘who’s boss’. The exchange rate fluctuated greatly, but as time passed, the market regained its cool. This is because I think the threat of tariffs is basically for negotiation purposes. The analysis came out as “barking rather than biting.” As in the first term (2017-2000), Trump’s threat will continue for the next four years and create large and small volatility. However, the prevailing view is that it will not collapse the market. This is the background for the S&P 500 index, which continued its upward trend for 7 consecutive days and exceeded 6,000.
At 6:30 p.m. yesterday, President-elect Trump announced through Truth Social that he plans to impose an additional 10% tariff on China and a 25% tariff on all products from Canada and Mexico on his first day in office on January 20th. In the case of China, it was pointed out that the tariffs on fentanyl, a painkiller used as a narcotic, were due to tariffs on drugs and immigration in Canada and Mexico.
The foreign exchange market was greatly shaken. As the dollar strengthened, the Canadian dollar fell to its lowest level in four years. The Mexican peso has fallen to its weakest level since 2022. The Chinese yuan also fell by about 0.4%. Europe, Japan, and Korea were not even mentioned in Trump’s announcement, but their exchange rates and stock prices fell. This can be interpreted as concerns that a new trade war will shake up the global supply chain.
But over time, the initial rapid movement stabilized. China’s Shanghai stock market was not significantly affected, falling 0.12% and Hong Kong’s Hang Seng index rising 0.04%.
The New York financial market was also calm. The volatility index (VIX), also known as the ‘fear index’, remained below 15, a ‘calm level’, with little change overnight. Yields in the New York bond market, which plummeted yesterday due to the ‘Besent effect’, showed a slight upward trend. The dollar eventually rose only 0.06%. And the New York stock market’s S&P 500 index started with a 0.2% rise.
▶ Famous investor Bill Ackerman, founder of Pershing Square, said, “Trump’s 25% tariff will not be implemented, and even if implemented, it will be eliminated if Mexico and Canada stop the flow of illegal immigrants and fentanyl into the United States. In other words, Trump will not implement the tariff. “We will achieve the economic and political results that are in the best interest of the United States.”
▶Solita Marcelli, Chief Investment Officer at UBS Global Asset Management, said, “Tariff policy is showing itself as a negotiating tool, and the timing and narrow goals of the threats suggest room for negotiation. These tariff threats are causing short-term market volatility. “This may happen, but market fundamentals remain positive,” he said.
▶Nat Alliance strategist Andrew Brenner said, “We still see tariffs as more strategic, and we think the bark will be worse than the bite.”
▶Dennis DeBoucher of 22V Research also interpreted, “The fact that Trump linked drug and immigration issues, rather than trade policy or the economy, to tariffs means he sent a signal to investors that this announcement was a negotiation tactic rather than a policy tool.”
In fact, in May 2019, during his first term, Trump threatened to impose a 25% tariff on Mexico if it did not take steps to stop illegal immigration. Starting in June 2019, the rate will be increased by 5% each month until Mexico effectively stops the influx of illegal immigrants, reaching 25%. However, the tariff threat was withdrawn through negotiations between the two countries on June 7. This is thanks to Mexico’s agreement to crack down on illegal immigration.
In any case, this type of tariff threat will continue, and whether it is implemented or not, it will continue to have large and small impacts on the market.
▶Evercore ISI said, “Investors know that Trump sometimes threatens to negotiate and that there is a possibility that he will not actually impose tariffs on his first day in office. However, Trump will not stop using tariffs as a policy tool. This incident affects the financial markets. “Even if we have a Treasury Secretary who understands well, the tariff announcement ultimately reminds us that Trump has the power,” he analyzed.
▶Vital Knowledge founder Adam Chrysaperli said, “I don’t think the risk of a 25% tariff on all imports from Mexico and Canada is high. They already have trade agreements in place, and the USMCA was negotiated and signed by Trump. “However, these volatile threats could continue for the next four years and will impact investor confidence over time.”
▶Andrew Sleeman, portfolio manager at Morgan Stanley Asset Management, said, “The current spirit of speculation is in part what typically happens during the ‘honeymoon period’ after a new president is elected. But once the new administration starts signing documents, investors start to take advantage of everything.” “You will realize that things are not perfect and then the market tends to pull back.”
The market forgot Trump’s threat and went back to normal.
Economic data was mixed.
New home sales in October fell 17.3% from the previous month to 610,000 units (annual rate). It was significantly below Wall Street’s expectations (730,000 homes) and September (738,000 homes). The largest decline was in the South, at 27%. Cathy Jones, fixed income strategist at Charles Schwab, said, “New home sales fell to the lowest level since November 2022. The hurricane that hit the southern U.S. in October appears to have led to the decline, but the rise in mortgage rates that began in September is also putting pressure on the market. “There is,” he said.
The November consumer confidence index announced by the Conference Board recorded 111.7, up 2.1 points from the previous month. It’s an increase for two consecutive months. It also exceeded Wall Street’s estimate of 111.3. “Consumer confidence has reached the upper end of the range it has seen over the past two years,” said Dana Peterson, economist at the Conference Board. “The improvement in November was largely due to more positive assessments of current conditions, particularly the labor market.”
Looking at detailed responses, 33.4% of consumers responded that ‘jobs are abundant’, down from 34.1% in October. However, the number of respondents who said ‘jobs are difficult to find’ decreased from 17.6% to 15.2%, further reducing the ’employment gap’ (labor differential), which is the difference between these two responses. The ’employment gap’ is highly correlated with the unemployment rate in the United States. Consumers expecting a recession in the next 12 months also fell to their lowest level since the question was first asked in July 2022. 56.4% of consumers expected stock prices to rise next year. This is also a record high. Only 21.3% of people expected the stock price to fall. Short-term (12-month) inflation expectations fell from 5.3% last month to 4.9% in November, the lowest since March 2020. RSM said: “The continued rebound in the ’employment gap’ from September’s low is a sign that employment will rebound strongly in November after the disappointing October labor report. The overall improvement in confidence suggests that strong employment will sustain consumer spending for the remainder of the year. “It is also a signal that this is the case.”
Goldman Sachs said, “November’s consumer confidence index rose in line with expectations, and October’s index was revised upward. New home sales in October fell by a much larger amount due to the impact of the hurricane,” and lowered its fourth-quarter GDP growth estimate to an annualized rate. The baseline was maintained at 2.4%.
At 2 p.m., the minutes of the November Federal Open Market Committee (FOMC) meeting were released. Key phrases include:
▷Participants over time gradually It was expected that a move to a more neutral policy position would be appropriate.
▷Many participants said that uncertainty about the level of the neutral interest rate made it complicated to assess the extent of monetary policy constraints, and that policy constraints gradually It was pointed out that it would be appropriate to reduce it.
▷Some pointed out that if inflation remains high, interest rate cuts could be paused and maintained at a limited level, while others noted that policy easing could be accelerated if the labor market slumps or economic activity falters.
▷As a result of participants evaluating risks related to the economic outlook, the upward risks to the inflation outlook showed little change, and the downward risks to employment and growth appeared to have decreased somewhat.
FOMC members generally agreed that future interest rate cuts need to be cautious, and uncertainty about the level of the ‘neutral interest rate’ was cited as one of the reasons for exercising caution. There was no mention of the impact of the presidential election results on monetary policy. All the staff memo said was that stock market volatility rose before the results came out on November 5 and then fell afterwards.
▶Evercore ISI said, “The November meeting minutes did not provide much information in particular about the upcoming December meeting. There was no formal discussion of the impact of Trump’s election on the economic outlook, risks, and policies. The word ‘gradual’ was used. However, in the past, this expression was used to mean that the interest rate was adjusted at every meeting rather than at every meeting, so it could indicate the possibility of skipping the December meeting, but that it would be ‘gradual’. It is acknowledged that the expression could also be interpreted as supporting the possibility of skipping, while the economic assessment that ‘the upside risks of the inflation outlook showed little change, and the downside risks to employment and growth appeared to have decreased somewhat’ is somewhat dovish. (dovish)”
There wasn’t much new information. However, there was one thing that the market paid attention to.
▷Some mentioned that it would be valuable to make a technical adjustment to set the interest rate (4.55%) provided by the ‘Standing Reverse Repo Organization’ (ON RRP) at the lower base rate (4.50%) at a future meeting.
Currently, the Fed is absorbing surplus liquidity in the market by providing an interest rate of 5bp more than the base rate. If this is aligned with the bottom, financial companies can release more of this money into the market. Wall Street interpreted that the Fed was now concerned about reducing market liquidity. This means that the end of quantitative tightening (QT), which continues to reduce bond holdings, is approaching. “This is a strong early signal that the Fed is concerned about liquidity, which is probably very positive news for markets,” said Andrea Steno Larsen, founder of Steno Research.
JP Morgan published a report predicting that the Fed will end QT in the next few months. This means that the RRP balance, which is considered surplus liquidity, has decreased significantly. QT can continue for about 3 months, but after that, bank reserves may decrease due to QT. Fed Director Christopher Waller previously said, “Bank reserves at 10-11% of GDP may be sufficient.” Since the current reserves are at that level, it was expected that QT could end in the first half of next year. If QT continues in a situation where surplus liquidity has disappeared, short-term interest rates may fluctuate rapidly, as happened in 2019, and market volatility may increase.
After the FOMC meeting minutes were released, the increase in government bond yields decreased. In the end, at around 4 p.m., the yield on 10-year government bonds was trading at 4.30%, up 3.7 basis points, and the yield on 2-year bonds was trading at 4.258%, up 0.6 basis points.
In addition to the FOMC meeting minutes, there were two other factors that helped Treasury yields remain somewhat stable despite Trump’s threat of tariffs (which could stimulate inflation).
First, government bond auctions continued to perform well. At 1 p.m., the results of the 5-year Treasury bond auction came out. The bid rate was 2.43 times, higher than last month’s 2.39 times, and the issuance interest rate was 4.197%, 0.2bp lower than the market interest rate (WI) at the time of issuance of 4.199%. The fact that the issuance interest rate was set lower in the 5-year note auction means that there was sufficient demand.
Second, Israeli Prime Minister Benjamin Netanyahu announced his intention to ceasefire with Lebanese Hezbollah. Of course, he said, “The goal of the ceasefire in Lebanon is to focus on the threat from Iran, rest our troops, and isolate Hamas.” He also explained that the length of the ceasefire “depends on how the situation unfolds.” Israeli media reported that if a final agreement is reached with the Lebanese authorities, who negotiated on behalf of Hezbollah, the ceasefire will take effect at 10 a.m. on the 27th.
International oil prices, which had been rising in the morning, turned to a downward trend following Israel’s announcement. West Texas Intermediate (WTI) closed at $68.77 per barrel, down 0.25%. This is the lowest level since the last 15 days. The decline in oil prices is a factor suppressing inflation.
In the end, Trump’s threat of tariffs was seen as a negotiation purpose, and the New York stock market closed higher for the 7th day based on the expected end of QT and the good news of the Israel-Hezbollah ceasefire. The S&P 500 index rose 0.57%, the Nasdaq rose 0.63%, and the Dow ended trading up 0.28%. The Dow and S&P 500 reached record highs.
Unlike yesterday, today Big Tech took the lead. Nvidia rebounded 0.66%, Amazon rose 3.18%, Microsoft 2.2%, Meta 1.49%, and Apple 0.94%. Tesla continued to decline (-0.11%) for the second day on the news that it would be excluded from California’s electric vehicle tax credit.
However, the semiconductor industry, excluding Nvidia, failed to survive. AMD fell 2.42%, Intel fell 3.3%, and Micron fell 2.56%. If Trump’s threat from China continues, it will inevitably be negative. China is the world’s largest importer of semiconductors and equipment. In addition, Mizuho published a negative report on the memory industry, including Micron.
Mizuho said, “Due to weak demand and overstock for PCs and smartphones, the decline in DRAM prices is expected to continue until the first half of 2025. Server DRAM price growth is also expected to slow from the fourth quarter of 2024 and decline in the first quarter of 2025. “In addition, the technological development of Chinese companies such as CXMT is emerging as a new risk of oversupply in the DRAM market.” However, it was expected that HBM (high bandwidth memory) would continue to grow. It is predicted that the market is likely to stabilize in the second half of next year as the decline in DRAM prices decreases.
In addition to semiconductors, stock prices fell in energy, retail, manufacturing, and automobile companies with significant exposure to Mexico, Canada, and China, including ExxonMobil, Nike, Whirlpool, and Ford.
Due to the ‘Trump Trade’, economically sensitive stocks such as the financial industry, materials sector and small-cap stocks are rising, with Big Tech sometimes chasing them. Charles Schwab analyzed, “After the presidential election, the strength of the financial, energy and utility industries has continued, but big tech stock prices have turned weak. Overall, the bull market is maintaining well as the market has expanded.” Throughout this year, less than 60% of S&P 500 stocks were trading above the 200-day moving average, but as the market widened after the presidential election, 73% were trading above the 200-day moving average as of last weekend.
This morning tomorrow, personal consumption expenditure (PCE) prices for October will be released. Core PCE prices have been stuck in the 2.6-2.7% range since last May compared to the previous year, but Wall Street expects them to rise further to 2.8% in October. Compared to the previous month, it also rose by 0.3%. This would be the largest increase since April.
However, many observers believe that the December interest rate cut will not have much of an impact. Goldman Sachs predicted that the slowdown in inflation will continue, saying, “Much of the rise in inflation data is due to ‘catch-up’ factors (past increases are now reflected due to time lag).” “The higher data in October does not derail the long-term trend of slowing inflation,” said Russell Price, an economist at Ameriprise.
In the Chicago Mercantile Exchange’s (FOMC) Fed watch market, 63% bet on a December interest rate cut, slightly higher than the previous day’s 52%. This is thanks to the influence of the FOMC meeting minutes and the hawkish Minneapolis Federal Reserve Bank President Neil Cash Carry saying, “It is still reasonable to consider additional interest rate cuts at the FOMC in December.” “We are confident that inflation is trending gently downward, and right now the labor market remains strong,” he said.
Investors expect a cut in January if not in December. So even if it doesn’t come down in December, the impact may not be too big. But Trump could cause trouble. There are only nine days between Trump’s inauguration (20th) and the January FOMC meeting (28th-29th). It could be difficult for the FOMC to decide to cut interest rates if it imposes new tariffs on Mexico and Canada on its first day in office.
New York = Correspondent Kim Hyun-seok [email protected]
Given the potential for increased tariffs and the possibility of interest rate cuts, what strategies can investors employ to mitigate risk and potentially capitalize on the current market environment?
This article discusses the impact of Trump’s trade policies and the potential interest rate cuts by the Fed on the stock market.
Here are some open-ended questions divided into thematic sections to encourage discussion:
**Section 1: Impact of Trump’s Trade Policies**
* The article mentions that Trump’s threat to impose tariffs negatively affects the semiconductor industry. Do you think this is a short-term or long-term issue for the industry? Why?
* How do you think Trump’s trade policies might impact different sectors of the economy in the long run?
* Beyond the semiconductor industry mentioned in the article, which other industries are likely to be most affected by these trade tensions, and how?
**Section 2: Stock Market Reactions**
* The article highlights the “Trump Trade,” where economically sensitive stocks rise while Big Tech stocks lag. What factors do you think contribute to this trend? Is it sustainable?
* The article notes a widening of the market, with more stocks above their 200-day moving average. What does this suggest about investor sentiment, and what could cause this trend to reverse?
* Do you think the stock market’s reaction to Trump’s policies is justified? Why or why not?
**Section 3: Federal Reserve Actions and Inflation**
* The article discusses the possibility of a December interest rate cut and the upcoming release of PCE inflation data. What factors do you think the Fed will weigh most heavily in its decision?
* Do you believe the Fed should prioritize controlling inflation or stimulating economic growth? What are the potential consequences of each approach?
* The article mentions that Goldman Sachs believes the slowdown in inflation will continue. Do you agree? What factors could influence the trajectory of inflation in the coming months?
**Section 4: The Potential Impact of New Tariffs**
* How might the imposition of new tariffs on Mexico and Canada impact the US economy? Consider both short-term and long-term consequences.
* Do you think Trump’s potential actions are justified? What alternatives could be considered to address trade imbalances or other concerns?
* How might the timing of potential tariffs, so close to the January FOMC meeting, influence the Fed’s decision on interest rates?
These questions are designed to encourage critical thinking, diverse perspectives, and informed discussion about the complex econom ICFic and political landscape.
