Markets Brace for Trumpflation as Rate Cut Mirage Fades
Markets Brace for Trumpflation as Rate Cut Mirage Fades
1
The information on this website is general in nature and does not take into account your objectives, financial situation, or needs. Consider seeking personal advice from a licensed adviser before acting on any information.
As Donald Trump embarks on his second presidential term, investors are shifting focus from a prolonged rate reduction period to what is being called 'Trumpflation'.
This marks a notable shift towards anticipating inflationary pressures under Trump's pro-growth policies.
Damien Hennessy, the Head of Asset Allocation at Zenith Investment Partners, highlights this change in sentiment as investors foresee potential inflation due to Trump's economic agenda coupled with record-high U.S. debt levels. Such dynamics could further intensify market volatility.
"Bond yields are climbing because the underlying U.S. economy has surpassed expectations, running into disinflationary headwinds seen in the last 12 to 18 months," Hennessy remarked. "This situation is now pressuring U.S. equity market valuations."
Reflecting on recent trends, back in September, low bond yields had investors bracing for a recession, with predictions for interest rates dropping to 2.8% by early 2026. Current expectations, however, have shifted towards a rate increase nearing 4%. The market has transitioned from forecasting up to nine cuts to possibly just one or two, signifying a significant turnaround.
Hennessy noted a rise in U.S. 10-year Treasury yields to 4.8%, impacting both the stock and bond markets. Concurrently, the U.S. dollar's rise has led to a depreciation of the Australian dollar to US62 cents.
"Market dynamics, driven by the anticipated rapid enactment of many of Trump's policies in 2025, hinge on sustained economic growth around 2.8%," explained Hennessy. "Yet, this optimism may face challenges as not all policies may be quickly executed as some expect."
With bond yields nearing 5%, Hennessy posits that bonds could offer substantial value for long-term investors, prompting a reconsideration of portfolio compositions to include bonds and duration. He added, "Until now, rising bond yields have been largely ignored by equity markets, but there comes a threshold where they begin to challenge equity valuations significantly."
The correlation between high bond yields and reduced risk premiums in equities necessitates confidence in continued earnings growth. Hennessy anticipates that the tension between bond yields and equity valuations will dominate market discussions throughout 2025.
Addressing the Australian market, Hennessy observed that local conditions remain challenging. "Valuations domestically are stretched, confronting Australian equities with a difficult environment. The sentiment may benefit slightly from a rate cut, but overall, the Australian share market faces considerable challenges."
The insights provided in this article are based on an analysis originally reported by Yasmine Raso on January 22, 2025.
Published:Wednesday, 22nd Jan 2025 Source: Paige Estritori
Please Note: If this information affects you, seek advice from a licensed professional.
In the third quarter of 2025, Australian small to medium-sized enterprise (SME) manufacturers demonstrated notable resilience, achieving a 9% increase in sales compared to the previous quarter. This growth brought the average sales figure to $625,400, marking a significant recovery from the subdued performance observed earlier in the year. - read more
Effective 28 February 2025, the Australian Banking Association's revised Banking Code of Practice introduces significant enhancements aimed at bolstering protections for small and medium-sized enterprises (SMEs). This update marks the first revision in four years and reflects a concerted effort to address the evolving needs of the SME sector. - read more
Working capital is the lifeblood of any business, serving as the catalyst for sustainability and growth. For Australian businesses, maintaining a healthy level of working capital ensures that operations run smoothly and expansion opportunities can be seized without delay. The ability to meet short-term liabilities, invest in product development, and respond to market demands hinges on this critical financial metric. - read more
Embarking on a startup journey is an exhilarating challenge that requires not just a brilliant idea, but a solid foundation of financial support to turn that idea into reality. Finding the right funding can be a make-or-break moment for many startups. Here, preparation is more than just a good practice; it's the backbone of any successful loan application. - read more
Need Help Finding a Loan?
All finance quotes are provided free (via our secure server) and without obligation. We
respect your
privacy.
Knowledgebase
Underwater Mortgage: A mortgage in which the balance owed on the loan is greater than the value of the property securing the loan.
