The employment figures – the forcefulness of the 256 thousand new jobs – place the recent decisions of the Powell Fed in a clear off-side position. The bonanza is not free of flats. Since September also, the bonds have expressed their disagreement in a state of alert.
Surprise in the US labor market. Nobody expected the creation of 256 thousand net jobs in December. Yes, one hundred thousand fewer positions. Unemployment decreased by one tenth to 4.1%. Where Sahm’s rule identified a completed recession there is a bonanza that does not stop. President Biden’s legacy is formidable. And that’s not surprising. It was known in advance, although the voters did not have it in mind. Jerome Powell’s Fed, which since September cut its rates by a full point, also provided a strong extra boost. Just like the enthusiasm that the electoral victory of donald trumpon November 6, with the promise of more deregulation and fewer taxes.
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Just as there is no evil that does not come with good, prosperity is not free of flats. Since September also, the bonds have expressed their disagreement in a state of alert. In his opinion, the economy needs urgent moderation and not more stimulants. From the beginning, they disagreed with the Fed’s agenda and the political campaign. And they raised the cry – and the rates – to the sky. When the central bank lowered short rates by half a point, bonds raised long rates by the same magnitude. And the fight continued in an open confrontation. The Fed cut one hundred basis points. From 5.50% to 4.50%. One hundred basis points raised the ten-year rate. From 3.60% to 4.60%. In December, Powell hinted that the official rate reduction process was entering pause mode. In principle, until the Trump Administration deploys its concrete initiatives. Long rates continued their rise. They do not wait for the president-elect to show his cards.


Long rates and the dollar rule
The employment figures – the forcefulness of the 256 thousand new jobs – place the recent decisions of the Powell Fed in a clear off-side position. The ten-year rate is now 4.80%, an advance of 120 basis points since the monetary policy pivot was activated. The more the bonds are scared, the more the strong dollar is affirmed in the exchange markets. Thus, the financial conditions that the Fed wanted to relax are tightened at the margin. The Stock Market, which rehearsed a powerful Trump rally from September to November, has been experiencing since December the stubborn opposition of fixed income. Head down, he stopped marking the agenda. It is the long rates and the dollar that rule. Fear and no longer ambition. If the economy calms down, which keeps bonds up at night, it would suit him better.
There are two concerns on Wall Street. Will the rise of the ten-year rate shatter the 5% threshold, the ceiling of the most recent cycle? After seeing employment and its unexpected vigor, and discovering in the minutes a Fed concern about inflation that it kept hidden, Will a monetary policy error have to be corrected? Instead of resuming lowering rates, won’t Powell have to raise them again in 2025?
At this point, the bonds have a fixed idea and reality proved them right. It will be enough for them with a bad inflation reading, on time, this week, for the long rate to challenge 5%. Trump takes office next week. Any outburst, to which he is so fond, will be enough to achieve the same outcome. The burden of proof was reversed. Trump will have to make efforts to ensure that inertia does not pierce the 5% ceiling. By shaking up his campaign platform (more tariffs, mass deportations and fewer taxes), even if he does not execute it later, he would give an easy foot to the escalation.
Trump-Powell: who has the floor?
And what will the Fed do? Didn’t Powell know what he was exposing himself to? The data may have surprised you. The detail, perhaps yes. Not its underlying trend. It was never necessary to dismantle the rates like this. Half a point when the campaign was still alive, and another half when Trump had already won. Why, if the economy was growing at 3%? Only because Powell imposed it. And he did not accept any objection to the contrary. Let Michelle Bowman or Beth Hammack, who knew how to vote dissent, say it. Why would you want to change your plan now? If he truly feared inflation he would not have been so unnecessarily aggressive. The employment report is very robust, but tinged with gently declining wage pressures. In essence, the Fed believes that inflation is under control. Market prices evolve within the 2% target. Those that still resist are imputed prices (such as the cost of housing services). And the Fed is patient. He is in no hurry to claim victory.
Powell does not fear the inertia of past inflation. He is distrustful of the decisions that the new White House may make. Trumponomics won’t be very inflationary, says former chairman Ben Bernanke. We’ll see, suggests Powell, who has already made all the arrangements to watch it from the box. If Bernanke is right, by mid-year, the Fed will be able to get back on the downward path. That’s the carrot. Is the rate hike the cudgel? Yes. But, it is in the hands of the bonds. The Fed promises to fold its arms. And he won’t talk about increases. It is Trump who now has the floor. And you have the ideal antidote at your disposal, the chainsaw of spending. Will you dare to light it up with the announcement of rising tariffs? Or he will prefer to brandish a handful of distractions – the new “axis of evil”: Panama, Denmark and Canada – as to ease the internal pressure, displace the belligerence outside, and so that Wall Street is not ruined with the change of government.
Source: Ambito