Treasury yields have been falling, but the latest set of inflation numbers do not suggest the Fed will be able to cut rates this year. The Fed’s preferred measure of core inflation should begin to reaccelerate in June, which will make the optics of a rate cut very challenging in H2. Industrial metals prices are climbing, and container freight rates are also turning up sharply once again.
Meanwhile, the risks for long-dated Treasuries continue to build. Trump is leading President Biden in key swing states: this is arguably more important news for the bond market than this week’s inflation numbers. A second Trump Presidency could exacerbate the risks to the public finances, if tax cuts from the 2017 TCJA, many of which are due to expire at the end of 2025, are extended. Fully extending the TCJA tax cuts would add $4.6tr to the deficit between 2025-34 (including higher net interest outlays).
Trump’s proposed baseline 10% tariff on all imports, with a 60% tariff on China, may be just rhetoric, as the two Presidential candidates vie to be seen as being toughest on China. But there is little doubt that the green trade war is entering a new, more intense phase, which has broad, cross-party support. President Biden’s new tariffs on $18bn of Chinese goods, in strategic sectors such as semiconductors, EVs, batteries, critical minerals, and solar cells, threaten to raise costs for manufacturers, in the short run at least. China may be forced to retaliate, targeting the clean energy supply chain. An escalation into a full-blown trade war, would slow the green energy transition, which could eventually feed back into higher inflation through accelerated climate change.
