Welcome to Thoughts on the Market.
I’m Michael Zezas, Global Head of Fixed Income
and Public Policy Strategy. On this episode of the podcast, we’ll discuss how trade policy
uncertainty is creating volatility in markets.
It’s Wednesday, January 22nd, at 10am in New York.
Earlier this week, Donald Trump was again inaugurated as President of the United States.
In the days that have followed, we’ve fielded tons of questions from investors, who are
trying to parse the meaning of myriad executive orders and answers to press questions –
looking through that noise for signals about the if, when, and how of policy changes
around tariffs, taxes, and more. This effort is understandable because – as we’ve
discussed here many times – the US public policy path will have substantial effects on
the outlook for the global economy and markets.
And while we’ve spent some time here explaining our assumptions for the US policy
path, it's important for investors to understand this. Even if you correctly forecast the
timing and severity of changes to trade, tax, immigration, and other policies, you
shouldn’t expect markets to consistently track this path along the way. That’s because
there’s bound to be a fair amount of confusion among investors, as President Trump and
his political allies publicly speculate on their policy tactics and make a wide variety of
outcomes seem plausible.
Take tariff policy for example. On Monday, the President announced an America First
Trade Policy, where the whole of government was instructed to come up with policy
solutions to reduce goods trade deficits and related economic and national security
concerns. Tariffs were cited as a tool to be used in furtherance of these goals, and
instructions were given to develop authorities on a range of regional and product-
specific tariff options. Said more simply, while new tariffs were not immediately
implemented, the President appears to be maximizing his optionality to levy tariffs when
and how he wants. That will mean that all public comments about tariffs and deadlines,
including Trump’s comments to reporters on tariffs for Mexico, Canada, and China, must
be taken seriously – even if they don’t ultimately come to fruition, which currently we
don’t think they will for Mexico and Canada.
For markets, that max optionality can drive all sorts of short term outcomes. In the US
Treasury market, for example, our economists believe these tariffs and a variety of other
factors ultimately make for slower economic growth in 2026; and so we expect Treasury
yields will ultimately end the year lower. But along the way they could certainly move
higher first. As my colleague Matt Hornbach points out, tariff threats can drive investor
concerns about temporary inflation leading markets to price in a slower pace of Fed
interest rate cuts, which helps push short maturity yields higher.
So bottom line: investors should be carefully considering US public policy choices when
thinking about the medium term direction of markets. But they should also expect
considerable volatility along the way, because the short term path can look a lot
different from the ultimate destination.
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