Originally Posted 22 January 2025 – Inflation, tariffs, and other investor questions answered<\/p>\n\n\n\n
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My base case remains that US disinflation will continue, but I\u2019m closely watching signs of a potential resurgence in inflation.<\/p>\n\n\n\n
It\u2019s possible that we may see tariff threats used as a tool to achieve other policy goals without actual implementation of significant tariffs.<\/p>\n\n\n\n
I believe China\u2019s fourth-quarter growth is sustainable, and largely due to significant stimulus from policymakers.<\/p>\n\n\n\n
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Investors around the world are focused on some key questions regarding the path of US inflation, the possibility of tariffs, the progress of the Chinese economy, and policies regarding bitcoin. Not to mention some unusual (but not unprecedented) moves in the US 10-year Treasury yield. Here, I address some of the most common questions I\u2019ve gotten from clients since the start of the new year.<\/p>\n\n\n\n
My base case remains that disinflation will continue as very restrictive monetary policy has helped normalize the US economy. I expect disinflationary progress to be imperfect, as it was in 2024, with periods of significant reduction in inflation and other periods with little or no reduction.<\/p>\n\n\n\n
However, I am concerned about signs of a potential resurgence in inflation.<\/p>\n\n\n\n
We will have to watch the situation closely.<\/p>\n\n\n\n
When tariffs were implemented in 2018, they caused the S&P 500 Index to experience higher volatility and end the calendar year lower. They caused even more damage to other markets. However, this time around seems like it could be different \u2014 there may be more use of tariff threats as a tool to achieve other policy goals and less implementation of actual tariffs. In any event, tariffs had a very temporary impact on the stock market in 2018, so I would not expect new tariffs to impact investors beyond very short time horizons.<\/p>\n\n\n\n
The 10-year US Treasury yield has risen about 100 basis points since the US Federal Reserve (Fed) began cutting rates in September. On Sept. 17, the yield was 3.7%, but that rapidly climbed to 4.79% on Jan. 13.2<\/a><\/sup> It\u2019s unusual to have long yields rise once the Fed starts to cut rates, which has some investors scratching their heads.<\/p>\n\n\n\n However, there is precedent for this if we go back to the 1990s. In 1995, the 10-year US Treasury yield was 6.19% on July 5, the day before the Fed decision to cut rates. By Aug. 23, it had climbed to 6.6% before starting to ease.3<\/a><\/sup> This period was unique in that it followed the last time the Fed was able to tighten rates but avoid a recession. I\u2019ve mentioned for some time that the current period has been analogous to the mid-1990s<\/a> in several different ways; the rise in the 10-year yield is just one more similarity.<\/p>\n\n\n\n To prognosticate on where the 10-year US Treasury yield will go, it\u2019s important to discuss which factors impact the yield. Theory suggests that the 10-year US Treasury yield is determined by expected short rates, which includes inflation expectations and growth expectations and therefore Fed expectations, plus a term premium, which is the compensation investors require to hold a bond with a longer maturity. The term premium is quite amorphous and is impacted by a variety of factors, including Treasury supply and demand dynamics \u2013 a broad category that encompasses a number of components, including quantitative easing and tightening as well as expectations around fiscal deficits.<\/p>\n\n\n\n Yields can move rapidly, as we saw this past fall, as factors influencing the yield can be quickly impacted by data and even \u201cFedspeak.\u201d Just look at the 10-year US Treasury yield\u2019s move last week, from Monday\u2019s peak of 4.79% to Friday\u2019s close of 4.61%.4<\/a><\/sup> That was a result of lowered inflation expectations in response to the December core Consumer Price Index reading and some dovish comments from Fed officials.<\/p>\n\n\n\n Because I believe there will be more disinflationary progress this year, I don\u2019t believe the 10-year US Treasury yield will climb much higher \u2013 unless concerns about the fiscal deficit grow and bond vigilantism takes hold. This of course will depend on the Trump administration\u2019s policy agenda this year \u2013 whether it\u2019s focused on tax cuts or government cost cuts. Having said that, my base case is that the 10-year yield won\u2019t pierce 5% this year. although I do think we will see some volatility in the yield given elevated uncertainty. I do think there could be periods where concern over fiscal deficits moves the yield higher, but not dramatically higher.<\/p>\n\n\n\n Developed economies\u2019 government bond yields have largely moved in the same direction, and I expect that correlation to hold. I do expect some anomalies in terms of individual relationships; for example, the Greek 10-year bond yield was eclipsed by the French 10-year bond yield last year as a result of specific political and fiscal issues for France. I expect those types of anomalies to continue as \u201ccore\u201d eurozone economies continue to feel pressure while peripheral eurozone economies perform relatively better.<\/p>\n\n\n\n I believe we\u2019re likely to see a rise in the US stock market this year, for a number of reasons.<\/p>\n\n\n\n China had a strong fourth quarter, as evidenced by its gross domestic product growth of 5.4% year-over-year.6<\/a><\/sup> China\u2019s industrial production grew by 6.2% year-over-year in December 2024, surpassing expectations and its November growth rate of 5.4%.7<\/a><\/sup><\/p>\n\n\n\n It\u2019s important to note that this was China\u2019s fastest pace in industrial output growth since April. Some might argue that this is largely the result of a \u201cpull forward\u201d of purchases in advance of potential tariffs from the Trump administration and is therefore unsustainable. But I believe this is largely a result of the very significant stimulus coming from Chinese policymakers and that it is very sustainable.<\/p>\n\n\n\n In terms of tariffs, I\u2019m becoming more confident that the new Trump administration is thinking of tariffs as a means to an end rather than an end, which suggests we may not see implementation of any significant tariffs on Chinese goods \u2013 or any goods. Tariffs could be used to achieve policy objectives such as immigration reform (i.e., threats to tariff Mexican goods if Mexico does not cooperate with US immigration policy) and purchase of US goods (i.e., threats to tariff European goods if the European Union does not buy more US energy). There is some precedent for this. During the Reagan administration, pressure on Japanese and German automakers to submit to \u201cvoluntary export restraints\u201d led to the building of auto factories in the US, which still exist today and provide many jobs to US workers. I will of course be following the tariff situation closely.<\/p>\n\n\n\n The Bank of Japan will meet this week and is increasingly expected to hike rates, which is causing some to be concerned about the potential market impact given what happened when it unexpectedly hiked in late July. However, a rate hike this week would not be a surprise, so I wouldn\u2019t expect the same impact \u2013 and it should send a positive message that the Japanese economy continues to normalize. However, there is the potential that a hike this week could cause carry trade unwinds and some increased volatility. We will want to follow the situation closely.<\/p>\n\n\n\n <\/p>\n\n\n\n <\/p>\n\n\n\n Inflation, tariffs, and other investor questions answered<\/p>\n","protected":false},"author":1242,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":"","jetpack_post_was_ever_published":false},"categories":[14,808,146,12,153,7],"tags":[362,322,291,314],"contributors-categories":[427],"class_list":["post-201617","post","type-post","status-publish","format-standard","category-fixed-income","category-government-bonds","category-macro","category-securities","category-stocks","category-traders-insight","tag-economic-outlook","tag-inflation","tag-macro","tag-market-outlook","contributors-categories-invesco-us"],"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"\nWill the 10-year US Treasury yield reach 5% or higher?<\/strong><\/h2>\n\n\n\n
Will global government bond yields also move higher?<\/strong><\/h2>\n\n\n\n
What will happen to the US stock market this year?<\/strong><\/h2>\n\n\n\n
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What will happen to the Chinese economy this year?<\/strong><\/h2>\n\n\n\n
Looking ahead<\/strong><\/h2>\n\n\n\n
Dates to watch<\/h4>\n\n\n\n
Date<\/strong><\/th> Report<\/strong><\/th> What it tells us<\/strong><\/th><\/tr> Jan. 21<\/td> UK Unemployment <\/td> Indicates the health of the job market.<\/td><\/tr> <\/td> UK Average Earnings Index<\/td> Measures wage growth for UK workers.<\/td><\/tr> <\/td> Eurozone ZEW Economic Sentiment<\/td> Measures economic sentiment in the eurozone for the next six months.<\/td><\/tr> <\/td> Canada Consumer Price Index <\/td> Tracks the path of inflation.<\/td><\/tr> Jan. 22<\/td> Korea Gross Domestic Product<\/td> Measures a region\u2019s economic activity.<\/td><\/tr> Jan. 23<\/td> Bank of Norway Monetary Policy Decision<\/td> Reveals the path of interest rates.<\/td><\/tr> <\/td> UK GfK Consumer Confidence<\/td> Measures the level of consumer confidence in economic activity in the UK. <\/td><\/tr> <\/td> Bank of Japan Monetary Policy Decision<\/td> Reveals the path of interest rates.<\/td><\/tr> Jan. 24<\/td> Eurozone Purchasing Managers\u2019 Indexes<\/td> Indicates the economic health of the manufacturing and services sectors.<\/td><\/tr> <\/td> UK Purchasing Managers\u2019 Indexes<\/td> Indicates the economic health of the manufacturing and services sectors.<\/td><\/tr> <\/td> US Purchasing Managers\u2019 Indexes<\/td> Indicates the economic health of the manufacturing and services sectors.<\/td><\/tr> <\/td> University of Michigan Survey of Consumers<\/td> Provides indexes of consumer sentiment and inflation expectations.<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n Footnotes<\/h3>\n\n\n\n
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