Market participants are waking up to an uncomfortable reality regarding the near-term domestic macro read-through of “Trump 2.0.”
That’s according to Nomura’s Charlie McElligott, who on Monday said “it just seems to me that people are getting their arms around the implications of the Trump administration’s policy mix and current economic circumstances.”
Suffice to say what was a consensus “no landing” view predicated on assumptions about Trump’s determination to “run it hot” is experiencing a rethink. Now, investors are asking if rapid cuts to federal spending (which in this context is more or less synonymous with culling federal payrolls) together with rampant trade uncertainty might “look like a far more serious ‘growth’ drag,” as McElligott put it, flagging “significant uncertainties on multiple fronts which should ultimately hit both nominal and real GDP.”
In the equities options space, such worries manifested late last week as an uptick in demand for crash hedges and, naturally, steeper skew.
The figures give you a sense of things. On Friday, when PMI data suggested the US services sector crashed into contraction this month just as inflation expectations took off to three-decade highs (a poor read on existing home sales was insult to injury), “downside hedging showed greater urgency,” Charlie wrote, flagging “particularly large customer buying of SPX crash puts.”
Importantly — and McElligott mentioned this — the signal-to-noise ratio from the equity options space is lower than it might’ve been prior to the rise of 0DTEs. In other words, it’s hard to say what’s a bet and what’s a hedge on some days.
Still, the data’s starting to roll over in the US relative to consensus, as illustrated in the two-pane on the left, below. The chart on top’s the Bloomberg economic surprise index for the US. The bottom pane shows Citi’s gauge (click to enlarge as always).
“The surprise contraction in [S&P Global’s] US service PMI to a two-year low got the risk-off trade rolling, as the growth scare scenario I’ve been discussing continues to pick-up incremental delta [albeit] a bit ahead of my Spring schedule,” Charlie went on.
The “spring schedule” bit’s an allusion to the post-COVID US macro seasonality mentioned here on any number of occasions in recent weeks. You tend top get hot readouts in Q1, which makes anything “less good” in Q2 feel like a slowdown. The figure on the right, above, illustrates that phenomenon.
Fund managers polled by BofA this month were still convinced of the soft landing story, and they’re putting a lot of stock in the “no landing” narrative too. Subjective “hard landing” odds loitered near record lows at just 6% in the poll. But price action in STIRs suggests Friday might’ve marked a turning point.
The figure and table above show you the one-day change in SOFR-implied “landing” scenarios.
In the eyes of rates traders, Friday’s unfortunate round of US macro data materially increased the odds that the Fed will be compelled to grapple with a slowdown at some point this year, and one concern in that regard is that the Committee’s partially handcuffed by core inflation, which just spent a 47th month above target.
McElligott summed it up. “This is [what] my recent message on equities risks metastasizing has been about,” he wrote. “The perception is building that the various ‘paper cuts’ seen across the US economy from policy fears could realize into a growth scare.”
Awooga! Awooga! We need more oil/gas at lower prices right now!
Seems to me that we either end up in the no landing or hard landing scenario. Maybe I lack imagination, but I have a hard time imagining scenarios that result in 2-4 cuts given the circumstances. I expect Trump will royally screw things up and that’ll either mean inflation takes off and we get no cuts or he tanks the economy and brings about disinflation via recession. Right now, I’m leaning more toward the latter.
My personal economic uncertainty is increasing, so I am undertaking a comprehensive budget review and overhaul to reign in my out of control spending. I’ve recently hired half a dozen art history majors to assist, and as soon as I’ve got them on-board, I’ll be heading down to Staples to pick up a few thousand dollars worth of file folders and sticky notes at full retail prices. I expect to make myself great again “in about two weeks,” if not sooner.
This is a really interesting post. Are you sure you don’t, instead, have a “revenue” problem as opposed to a spending problem?
I am addressing the revenue side by putting a unilateral tariff on all my goods and service providers, but only after I finished up my purchases at Staples.
🙂
Awesome to hear you’ll be great again, Furious A.
Friday’s data definitely is the catalyst here, at least for eyes being opened to some very much in plain sight risks.
US investors are finally waking up and questioning their stalwart beliefs that Trump will be “business friendly” and would not do anything that would weaken the stock market because, it was said, he views the S&P index as an indicator of his success. Planning is now underway for a ceremony to bury and bid farewell to those bullish notions.
I’m not sure why anyone is surprised. During the Madison Garden torchlight rally and in the following days, Elon Musk said spending cuts imposed by the Mr. Trump would “necessarily involve some temporary hardship.” You were forewarned.
A more interesting question just starting to be murmured about is just who is in charge in Washington DC? The whole radical DOGE campaign to “slash the government” was never a priority emphasized by DJT on the campaign trail, nor in his first term. (Can you remember how he treated Paul Ryan?) Sure, rooting out his enemies was an oft-stated goal, but not burning down the whole government. What he focused on was deporting brown-skinned immigrants and using tariffs, not to level the playing field, but to force US and foreign-owned manufacturing companies to produce goods for the US market in the US. As well as banning all DEI initiatives in the public and private sectors.
So who is behind the whole DOGE crusade and efforts to circumvent the legal system to allow the unfettered pursuit of shareholder returns? It is doubtful that the president has the vision or capacity to carry out all of the policies outlined in Project 2025. It sure looks as if he has been given immigration, tariffs and DEI to run while being told to leave the rest to others.
You decide!
Great speculation.
Yes. But the first two paragraphs are hardly so. I’m amazed how complacent we all are in the face of these obvious risks. Bets on wide tail outcomes usually are unrewarding, but this one smells differently.
If one’s investment experience is ten or even fifteen years, I guess assuming the best makes total sense. Perhaps things ARE different this time?
Where’s that fellow geezer John Taylor?
Who’s behind it all…I say the BBBB … the Bitter Billionaire Boys Brigade…
Investors are supposed to be decent assessors of executive talent; yet the market seemed to have swallowed Trump 2.0 whole, and is only now discovering that the bait was poisoned. This calls for some serious introspection: How could it not see what was coming?
Burning down the government is Sir Donald’s path to being Chancellor. In the first term he weakened the Legislative branch and completely took over the Judiciary. His government by declaration employs his corporate strategy: do everything until they stop you. Very soon he will control it all and most of us won’t have even noticed. I’m not sure Congress has even met this year. Trump’s running Orban’s playbook very effectively so far. His problem is that there are no experts under him. He hasn’t got the intellectual muscle to pull this off.