Trump Trade Curve-Ball?

Introducing the ‘Long and Short’, an audio version of the LinkedIn newsletter by Neil Staines of Eurizon SLJ Capital, which discusses macroeconomic themes from the past week and has been produced for Professional Investors. Key topics include the Bank of England's recent rate cut and its updated inflation projections influenced by the UK Budget. The discussion moves to the impact of the US election on global markets, focusing on President Trump's fiscal policies and the implications for inflation and the US yield curve. Additionally, the episode examines the Fed Minutes, highlighting concerns in commercial real estate and selective business hiring. The core macroeconomic view suggests continued disinflation and growth moderation in the US, predicting a soft landing with higher equities, bonds, and a weaker dollar.

00:00 Introduction to the Long and Short

00:25 Bank of England Policy Update

01:08 UK Economic Outlook

01:46 Pricing President Trump

03:06 Three. That’s the magic number!

03:59 Just a Minute

05:16 The Long & Short of it…

06:02 Disclaimer and Legal Information

The opinions expressed in this podcast are those of the presenters and do not necessarily reflect the views of Eurizon SLJ Capital, Eurizon Capital, or the Intesa Sanpaolo Group. The information and opinions shared are intended solely for professional investors and should not be relied upon by other investors. Please note that the information provided in this recording is for informational purposes only and is not intended to be complete or constitute an offer to buy or sell securities or any derivatives. It has not been prepared in accordance with legal and regulatory requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. It does not constitute research on investment matters and should not be construed as containing any recommendation, advice or suggestion, implicit or explicit, for any investment strategy or financial instruments, the issuers of any financial instruments, or a solicitation, offer or financial promotion relating to any securities or investments. ESLJ and its affiliates do not assume any liability whatsoever for the contents of this podcast and do not make any representation or warranty as to the accuracy or completeness of any information contained in this communication.

Transcript

Welcome to the Long and Short, an audio blog production by Eurizon SLJ Capital that takes a look at the macroeconomic themes of the past week and has been recorded for professional investors. This is an audio version of a LinkedIn newsletter written by Neil Staines, published on the 29th of November 2024.

In our last piece, we discussed the evolution of Bank of England policy following the 25 basis point rate cut in the November Monetary Policy Report. We discussed the updated inflation projections, including the impact of the UK Budget on the inflation trajectory and, by extension, the monetary path. Despite increased borrowing making the Budget technically expansionary, the accompanying tax hikes will likely feel like fiscal tightening. While the Bank of England’s projected path of inflation sees a front-loaded rise, driven by energy base effects and, to some degree, the front-loaded fiscal loosening, it continues to return to target at the forecast horizon. Thus, the Bank was happy to cut rates.

Indeed, over the past couple of weeks, both the domestic backdrop of weaker-than-expected economic data and moderated ‘bond vigilante’ fiscal concern and the global backdrop have been supportive of lower yields, and the UK curve has moved significantly lower. We retain our long-held view that the UK economy is weaker than the data through Q3 suggested. While there have been some signs of growth moderation in the high-frequency data, we continue to expect faster rate cuts in the UK than is currently priced into the curve - though December is likely to witness a pause at the current policy setting.

Pricing President Trump

However, events in the UK have taken a back seat in the global macro space to the events in the US and the post election ‘Trump trade’ pricing across global markets. Indeed, in our last piece, shortly after the US election results became known, we argued that while markets are very keen to price in higher inflation as a function of ‘Trump policies’, we find it very hard to believe that the Trump Administration will pursue policies that are likely the root cause of their rejection of the Democrats. Near 40% of respondents said that ‘The Economy’ was their number one concern in the election - with growth running above 3% quarter-on-quarter annualised, that likely translates into ‘too high’ inflation and nominal prices. 

Furthermore, perhaps more pertinently, we noted that markets were anticipating unchecked fiscal expansion under Trump. Something we clearly disagreed with and continue to do so. Instead, we see fiscal consolidation or spending cuts likely through productivity enhancements in the public sector - notably, this has been the main or most consistent source of payroll growth over recent years, particularly in the Healthcare and Education sectors. Thus, we see downside risks to employment growth in 2025.

Three. That’s the magic number!

The announcement of Scott Bessent’s nomination for US Treasury Secretary and his reported advice to Trump to pursue a 3-3-3 policy – a 3% growth target, producing an additional 3 million barrels of oil per day and cutting the budget deficit to 3%, which is vastly below the consensus expectation for fiscal expansion under Trump, from our perspective is very significant. 

While we have been clear throughout that we did not expect unchecked fiscal expansion under Trump, markets held the opposite view, even in the face of clear and credible announcements from Ramaswamy and Musk in their capacity as representatives of the proposed Department of Government Efficiency. The prospect of lower, more conservative government deficits has significant implications for inflation and the US yield curve.

Just a Minute

The Fed Minutes this week were also significant. Firstly, it was interesting to note the clear reference to the further deterioration in Commercial Real Estate markets - something that remains a risk to financial stability and wider, very richly priced credit globally. Secondly, the Fed clearly stated that businesses have become more selective on hiring and more reluctant to raise prices - both potentially a sign of a weaker consumer going forward, mirroring the broad sentiment of retailers from q3 earnings season commentary.

Balancing the more dovish comments, the minutes also clearly stated that uncertainties remain around the neutral rate and that there is likely now a lower risk of a sharp labour market downturn. Ultimately, we still see a 25 basis point cut in December. However, next week's data, such as ISM Services and Manufacturing, JOLTS, ADP, the Beige Book and, of course, the all-important November Employment report will likely be decisive on that front.

With the current economic cycle at record correlation to the rate cycle, we see downside economic risks, including credit repricing, as being clearly countered, at least in part, by a Fed put, with rates still well into restrictive territory. 

The Long & Short of it

We have been clear over recent months that our core macroeconomic configuration argues for continued disinflation and growth moderation in the US. This is consistent with a soft landing in the US and, by extension, consistent with higher equities, higher bonds and a weaker dollar. 

Despite some near-term risks from volatility and geopolitical and national political developments, we continue to see normalisation of the labour market, growth moderation, and price disinflation. Notably, without an unchecked fiscal expansion, which could drive longer-dated yields significantly higher. In this regard, Three really is the magic number.

This newsletter is issued by Eurizon SLJ Capital Limited (“ESLJ”), a private limited company registered in England (company number: 09775525), having its registered office at 90 Queen Street, London EC4N 1SA, United Kingdom. ESLJ is authorised and regulated by the Financial Conduct Authority (FRN: 736926).

This newsletter is a marketing communication intended solely for professional investors in jurisdictions where the public offering of products or services is authorized and is provided only for information purposes.

It has not been prepared in accordance with legal and regulatory requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. It does not constitute research on investment matters and should not be construed as containing any recommendation, advice or suggestion, implicit or explicit, with respect to any investment strategy or financial instruments, the issuers of any financial instruments, or a solicitation, offer or financial promotion relating to any securities or investments.

ESLJ and its affiliates do not assume any liability whatsoever for the contents of this newsletter and do not make any representation or warranty as to the accuracy or completeness of any information contained in this communication.

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