Good morning. Well, that happened. Today’s Federal Reserve meeting should yield fewer surprises; markets are certain of a 25 basis point cut given last week’s weak jobs data. But the future of the Fed’s rate path is now more uncertain; see below. Let us know if you won or lost money in the election betting markets (Rob foolishly hedged his Trump bet at the last minute and came out about even): [email protected] and aiden.reiter@ ft.com .

Time to challenge the conventional wisdom about Trump and the markets

The market has reacted to the resounding Republican victory in exactly the way you would expect. For the market, Donald Trump’s big victory means a stronger dollar, more mergers and acquisitions, less regulation, crypto utopia and higher deficits, inflation and tariffs. That all went smoothly yesterday. For example:

• The S&P500 increased by 2.5 percent; the Russell 2000’s domestically focused small caps rose 6 percent.

• The yield on ten-year government bonds rose by 15 basis points, two-thirds of which was due to higher break-even inflation, while the remaining 5 basis points came from higher real interest rates. This represents a 70 basis point increase in the 10-year yield since October 1, when Trump’s rise in the polls and prediction markets took off.

• The futures market forecast for the Fed policy rate in December 2025 it increased by 12 basis points; Since October, interest rates have risen by 88 basis points.

• The KBW banking index rose 10 percent in anticipation of softer regulations and continued higher interest rates. The biggest winners were CapitalOne and Discover, which had renewed hope that their merger would go through.

• The government-sponsored mortgage guarantees Fannie Mae and Freddie Mac rose on expectations that Trump would return their profits to shareholders.

• Home builders fell as investors suspect higher interest rates will worsen the housing affordability problem.

• Dollar stores such as Dollar General and Dollar Tree fell sharply on concerns about Chinese tariffs. Dollar Tree, for example, directly imports 40 percent of what it sells, and the “vast majority” of that comes from China.

The list can go on endlessly. Investors think they know who they are dealing with in Trump. Probably yes. But that ‘probably’ is a bit dangerous here. The man is difficult to predict. He is not bound by history or his past statements. The distribution of outcomes for his presidency will have big tails. So while the central forecast for the markets should be more in line with what we saw yesterday, we need to think carefully about other possible outcomes.

The central dogma to be challenged is the link between deficits, inflation, interest rates and the dollar. In that context, consider the possibility that the market will contain Trump.

Start with the popular idea that Trump will appoint a mushroom to the Fed, which will help meet the need for low rates in the face of tax cuts and high spending. Would the bond market tolerate this? Shares?

Along the same lines, will Trump continue with deep tax cuts and sustainable spending as inflation picks up again and markets are spooked? Trump likes to use the markets as a benchmark for his performance. From 2016 to 2020, both the bond and stock markets conspired with his ego. Stocks had a bad run in the fourth quarter of 2018 and fell during the first month of the Covid-19 crisis. Otherwise they stood up. The rates were low or very low. We simply don’t know how he will behave in the face of continued market hostility. It might scare him away from economic conventions.

Remember, Trump just won an election by blaming Democrats for inflation. Given all that, how will he respond to the inflation caused by his tax, trade and immigration policies?

Trump genuinely hates trade deficits and believes that tariffs will eliminate them while doing little damage elsewhere. During the campaign, he said he would slap a 20 percent tariff on all imports and hit China with tariffs of up to 60 percent. How exactly will they be introduced?

Having higher trade barriers could be a purely political statement. But some in his circle – including his former trade adviser Peter Navarro – have suggested that imposing tariffs would be a negotiating tactic. If that were the case, Navarro points out in the conservative Project 2025 policy booklet that there are two possible scenarios: other countries lower their trade barriers, or they raise tariffs in retaliation. The market seems to prefer the second scenario, which is clearly inflationary. What if the first one plays out?

As for China’s tariffs, it’s unclear whether there will be exemptions for products for which the U.S. can’t hope to compete with China (past exclusions range from X-ray machines to crab meat), or for which U.S. consumers would feel the pain directly. . Unhged is confident that Trump will quit before raising the price of iPhones by 60 percent.

The other major contributor to the consensus on higher rates is immigration. As we wrote, arrivals have recently helped keep inflation in check by slowing wage growth. Trump has promised to effectively close the southern border. This would lead to wage inflation among workers already in the country. That’s part of the point. But the wave of migrants is starting to subside, and the U.S. economy isn’t running as hot as it will in 2022.

Trump has also said he will deport undocumented immigrants who are already here. Vice President-elect JD Vance estimates the number at 1 million people per year. Once again, wage inflation is the point of the exercise. But how do you move a million people out of the country? We believe he will give mass deportations a chance. But there will almost certainly be legal challenges and ugly, violent scenes. How strong is Trump’s stomach? How strong is America?

One good read

In lighter news, Moo Two

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