The current expectations are for continued improvement in global growth and for the disinflationary trend to remain intact. That's also what the central banks have been telling us as they keep their reaction function skewed towards easing.
Regarding the first risk, there's lots of complacency around the TACO (Trump Always Chickens Out) trade. I can't even blame people for that because actions speak louder than words, and we've seen countless times Trump escalating to de-escalate soon after.
We are in the final month of the 90 days pause though and what happens after the deadline is still unknown. It's pretty clear though that the market will keep on fading any fear until the deadline because of wishful thinking. Therefore I wouldn't expect much from this front until the actual deadline.
The second risk is inflation. And this one has higher probability compared to renewed trade war, in my opinion. This comes from the expectations that economic activity could rebound strongly in the next months after kind of a pause in Q1.
Some leading indicators like the US PMIs have been showing a pretty notable pick up already.
There's been lots of media coverage on rising long term yields and they've been blaming it on fiscal spending. The reality is that the market has been just pricing in stronger growth and more inflation risk. For long term interest rates, the market takes into account three main factors: future central bank policy, inflation expectations and future supply and demand of Treasury debt issuance.
As long as this inflation risk remains intact, the path of least resistance for long term yields will remain to the upside. And if it increases in the next months, we will see the market pricing out the rate cuts expected for 2025 and beyond. This will have implications for many markets.
This article was written by Giuseppe Dellamotta at www.forexlive.com. Read More Details
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