Trump's Return and Fed’s Rate Outlook: What’s Ahead for the U.S. Economy

Last week was a tumultuous one, led by U.S. elections and the Federal Reserve's interest rate decision. The U.S. dollar continued to strengthen as Donald Trump returned to the White House, U.S. equities surged to record highs, and cryptocurrencies soared to unprecedented levels. Meanwhile, precious metals and emerging market currencies faced selling pressure.

With Trump expected to take office by the end of January, there is a risk of inflation reigniting and fiscal deficits widening if he implements policy moves such as tax cuts and tariff hikes. Such measures could increase import costs and further stimulate an already robust economy.

Given the potential impact of the Trump administration on the U.S. economy, market watchers are now expecting fewer rate cuts from the Fed next year, keeping U.S. Treasury yields elevated. JPMorgan's chief investment officer, Bob Michele, stated that 10-year Treasury yields could climb to 5% following Trump’s inauguration, which would signify a stronger dollar.

Last week, major investment banks like Goldman Sachs and JPMorgan adjusted their Fed forecasts to reflect fewer rate cuts. Besides, some investment banks anticipate the Fed may hold rates steady from January through July to assess the impact of Trump’s new policies on inflation and growth. Meanwhile, futures market data indicates that traders are pricing in a 64.9% probability of a quarter-point rate cut in December, with expectations that the reference rate will fall to 4% by mid-2025, a full percentage point higher than projected in September.

On Sunday, Minneapolis Fed President Neel Kashkari, in his first public remarks following last week’s Fed meeting, stated it’s too early to tell if Trump’s anticipated policies will stoke inflation and ultimately lead to fewer rate cuts. However, he added that a strong economy and higher productivity growth could result in less aggressive rate reductions than previously anticipated. By emphasizing that the Fed needs to wait to see which policies are actually implemented before incorporating them into their analysis, Kashkari’s statements supported growing expectations for steady rates in the Fed’s early meetings next year.

While discussions continue about the potential effects of “Trump 2.0” on the U.S. economy, markets will closely watch this week's upcoming producer and consumer price data, remarks from Fed policymakers, including Chair Powell, and retail sales figures.

The Consumer Price Index report, due Wednesday, is expected to show a 0.2% increase in overall inflation for the fourth consecutive month and a year-over-year rise of 2.6%, marking an acceleration for the first time since March. Excluding energy and food prices, the core index is expected to increase at the same pace as the previous month, rising by 0.3% monthly and 3.3% annually.

Market observers estimate that October prices have risen again. However, part of this increase is likely due to hurricanes boosting demand for cars and car parts and forcing more people to stay in hotels.

Despite the mixed outlook from recent inflation data, a few weak reports do not alter the overall downward trend, as Powell emphasized last week. Nonetheless, with the labor market remaining strong, policymakers may shift more focus toward inflation.

On the other hand, Trump's expected policies may affect price pressures even before he takes office. Some market watchers note that the anticipation of higher tariffs may prompt importers to accelerate shipments. Similarly, if consumers bring forward their demand, inflation could accelerate in the coming months.

Precious Metals Brace for Trump 2.0: A Tug-of-War Between Yields and Inflation Risks

During Trump’s second presidential term, with support from the Republican majority in the Senate and the House of Representatives, he is expected to be more effective than in his previous term. If the new president implements the tax and tariff policies promised before the election, the Fed will have less room for rate cuts, which is fueling the rise in Treasury yields. This, in turn, increases the opportunity cost of precious metals and puts them under selling pressure.

On the other hand, safe-haven demand supported by geopolitical risks, resilient demand from Asian countries, and strong purchases by central banks could continue to limit the downward movement in gold prices. Additionally, traders are factoring in the possibility that Trump’s policies may drive up U.S. inflation.

In summary, until the new U.S. president takes office in late January and the effects of his policies on the U.S. economy start to unfold, precious metals are likely to remain under pressure due to high yields and a strong dollar. However, a shift in the U.S. inflation outlook could alter market dynamics, potentially easing this pressure.

Hedge Funds Boost Oil Positions Amid Supply and Geopolitical Risks

Amid the volatile movements influenced by the election agenda, oil prices continue to maintain a positive outlook, driven by ongoing tensions in the Middle East and OPEC+’s decision to delay its planned production increase.

According to data from the Commodity Futures Trading Commission, hedge funds have raised their bullish positions on oil to the highest level since March. Net long positions in West Texas Intermediate crude oil increased by 48,143 contracts.

The geopolitical risk premium in oil rose again following reports that Iran was preparing to attack Israel via Iraqi territory. The ongoing tensions in the region continue to fuel supply concerns. In particular, the likelihood that the new president, Trump, will offer more support to Israel compared to the Biden administration keeps Middle Eastern conflicts in focus.

Meanwhile, in the face of global demand concerns, OPEC+’s decision to delay production increases continues to ease fears of an oversupply, providing a tailwind for the rise in oil prices.

Beijing’s Stimulus Disappoints Amid Mounting Economic Pressures and Tariff Threats

Last week, investors expecting large-scale stimulus measures to boost domestic demand and combat deflation were disappointed after a high-profile legislative meeting. Beijing announced a 10 trillion yuan ($1.4 trillion) program to address local government debt but fell short of introducing new incentives to support consumption.

Data from China over the weekend underscored the urgency of efforts to stimulate consumption and growth. Consumer prices barely budged, and factory gate prices continued to decline. In October, the Consumer Price Index rose 0.3% year-over-year, down from 0.4% the previous month. The Producer Price Index, on the other hand, fell 2.9% from the previous year, following a 2.8% drop.

Despite months of stimulus measures, China is still struggling to overcome challenges in domestic demand. Additionally, the possibility of Trump implementing a 60% tariff poses a significant threat to the Chinese economy, clouding sentiment toward the world’s second-largest economy. UBS Group downgraded China’s growth forecast following Trump’s election, projecting around 4% growth for 2025 and a notably slower rate in 2026.

While the potential impact of Trump’s trade policies on China’s economy is under discussion, on Friday, China’s State Counci