America is divided over what Trump will do to inflation. The stock and bond markets are, too.
Tariff-sensitive stocks are outperforming, even as market and survey-based measures of inflation expectations rise.
The country is divided over whether President-elect Donald Trump will propel inflation higher or wrestle it to the ground. Well, the US stock market and bond market seem a little divided on that, too.
Nearly one-third of respondents to the University of Michigan’s January survey of consumers “spontaneously mentioned tariffs,” according to the report, a share that’s up from less than 2% before the US vote. Director Joanne Hsu warned of “an emergence of inflationary psychology.”
The partisan gap here is monumental. For Democrats, inflation expectations are nearly as high as they were when price pressures peaked in mid-2022. Republicans barely anticipate any increase in consumer prices over the coming 12 months.
“The striking partisan split that emerged after the Nov. 5 presidential election has only intensified, with Republicans broadly expecting inflation to slow dramatically ahead while Democrats expect tariffs promised by the incoming Trump administration to push up prices,” wrote Eliza Winger, economist at Bloomberg Economics.
Well, the bond market in its unfailing wisdom has sent 10-year Treasury yields nearly 50 basis points higher since the election. One-year inflation swaps tied to the Consumer Price Index are currently trading around 2.7%, up from 2.33% on November 5. The Federal Reserve, for its part, is clearly worried that Trump’s trade and fiscal policies might stoke a reacceleration in price pressures.
Of course, since the vote we’ve also seen inflation largely surprise to the upside while the deterioration in the US job market has slowed (if not abated completely). So it’s ill-advised to pin this bond market move fully on the potential measures that might be pursued by the incoming administration.
On the other (invisible) hand, the stock market doesn’t seem too worried about tariff-fueled inflation. Since November 5, a basket of companies flagged by Goldman Sachs as most at risk if more trade barriers were enacted is up more than 4%, while the S&P 500 has gained less than 1% over the same period.
Goldman’s basket has included the likes of Nike, Yeti, Target, Ralph Lauren, and Lululemon.
