The odds of Donald Trump winning a second term have climbed again, following the assassination attempt on the former President. The image of Trump, bloodied and shaken, pumping his fist in the air, is already iconic, and will give him an air of invincibility heading into the November election. Another important legal victory for Trump yesterday adds further impetus to his campaign. So does the support of many of Silicon Valley’s tech titans and Elon Musk. The choice of JD Vance as running mate is clearly aimed at winning over blue-collar voters across key swing states of the industrial Midwest.
The curve is un-inverting as bond traders digest the implications of 2-3 Fed rate cuts this year, and a second Trump term. The past two CPI reports have been extremely benign. But long bonds have failed to stage a meaningful rally. The 30-year Treasury yield is still up 43 basis points YTD, rising to 4.46% yesterday (though it is dipping back again this morning). Fed rate cuts may simply steepen the yield curve further, if the labour market stays as healthy as it currently is. The secular drivers of higher longer-dated Treasury yields, including from climate change, demographics, higher military spending, derisking from China, remain in place.
To be clear, the deflationary global impulse from China will continue to reverberate in the short run. The Chinese automobile manufacturing PPI, for example, tumbled 2.3% y/y in June. But a stronger disinflationary impulse from China now, will inevitably lead to an even greater protectionist backlash. The threat of higher tariffs, and an escalating trade war, looms large. JD Vance and former Trump trade chief Robert Lighthizer are reportedly in favour of dollar devaluation to boost US exports. This would be negative for bonds, though it remains to be seen whether this is a serious policy option.
But in any case, the ongoing rise in Japanese bond yields will continue to pressure the long end of the US curve. Wage pressures are starting to show up in the scheduled, contractual cash earnings data (+2.50% y/y). This was the largest y/y increase in this measure of wages since January 1993. The latest BoJ Opinion Survey also showed a jump in inflation expectations in June. The public, at least, is conceiving of a material paradigm shift in the inflation outlook in Japan.
