U.S. stagflation may be the benchmark, gold is the "version answer"

Since Trump's election, U.S. Treasuries, the U.S. dollar, and U.S. stocks have completed a "return run" trend. From November 5, 2024, when he was elected, to January 20, 2025, when he took office, the dollar, U.S. stocks, and U.S. Treasury yields resonated upward. The market's understanding of Trump's policy mix is a set of punches leading to economic "overheating" and "inflation," with strong consensus expectations resulting in excessive trend trading: The 10-year U.S. Treasury yield once stood above 4.8%, the dollar index broke above 110, and residents' 5-year inflation expectations rose to a new high since the 2008 financial crisis. In such a scenario, interest rate cuts will be a long way off.

However, the expectation of "inflation" remains, but concerns about "stagnation" are growing. In his congressional speech on March 4, Trump stated that for the sake of medium- to long-term structural transformation, short-term economic discomfort could be tolerated. After this speech, Trump and his core officials intentionally focused on releasing negative economic expectations. As a result, the market began to anticipate that Trump might want to resolve high inflation and high interest rate issues through a "recession." The dollar, U.S. stocks, and U.S. Treasury yields all fell together, and have nearly retraced all the gains since Trump's election, with the market's "recession color" rapidly rising.

Through this "return run" trend, we can see the great uncertainty of Trump's 2.0 policies, and what may be more noteworthy is that the baseline scenario for the U.S. economy in the near future may be stagflation.

The economy is close to the edge of "stagnation," and signs of slowdown continue to emerge. The Atlanta Fed's GDPNow model has revised the annualized quarter-on-quarter real GDP for Q2 2025 down from +2.9% to -2.4% within a month, primarily due to downward adjustments in net exports, consumption, and residential investment forecasts, but an upward adjustment in equipment investment. We believe that the economy in the first quarter will not "recede" as sharply as the GDPNow model predicts, but a slowdown is difficult to avoid.

Net Exports: The short-term noise component is more significant, especially the surge in U.S. imports in January driven by gold imports, which the Bureau of Economic Analysis (BEA) does not include when calculating GDP.

Consumption: The first quarter may experience a significant cooling. Simply put, consumer spending = disposable income × propensity to consume, the latter is being impacted by multiple factors. In January, the U.S. household savings rate jumped by 1.1 percentage points to 4.6%, and the consumer confidence index fell sharply. The underlying reasons are: first, the uncertainty of tariffs has led to a significant rise in inflation expectations (Figure 5). Although the latest CPI and PPI data fell more than expected, it seems to have failed to reassure consumers; second, the decline in employment prospects (Figure 6), with tariffs and the DOGE budget cut plan potentially leading to fewer jobs in the future; third, the diminishing wealth effect. The recent pullback in U.S. stocks since February has shifted residents' expectations for future stock prices to pessimism (Figures 7-8), with about 30% of U.S. residents' assets being equity, and the shrinking of assets further undermines consumer confidence.

Fixed Investment: Corporate investment temporarily plays a "stabilizer" role. Residential investment is sluggish: high interest rates have limited easing, and tariffs have made builders worry about the risk of rising material prices, leading to potentially poor performance in residential investment. Corporate investment is currently stable, but the pressure of uncertainty is increasing: the manufacturing PMI new orders index and capital expenditure intentions both fell sharply in February, reversing the positive trend of the previous two months. The main reasons are the uncertainty caused by the yet-to-be-announced tariffs and federal budget cuts leading to a reduction in federal contracts and orders. However, looking at the whole year, if tariffs are announced and uncertainty is resolved, corporate equipment investment (manufacturing reshoring) and intellectual property product investment (AI global competition) could also become economic highlights.

Government Spending: The impact of budget cuts has not yet become apparent. The DOGE layoffs and budget cut plan continues to advance, and the impact in the first quarter is still not obvious, but it may become a drag factor in the future.

U.S. Inflation: High inflation remains a persistent issue unless a recession occurs. This year, inflation in the U.S. will be a recurring topic that continues to ferment. From a macro perspective, trade frictions and supply chain reshaping are objective realities for the foreseeable future, and even if Trump's tariffs do not materialize as expected, it will not change the situation. Therefore, maintaining a high inflation center is highly likely In addition, for this year, different components have different driving factors:

The room for a decline in service prices is limited. Aside from the new factor of deporting immigrants, there are also signs of stabilization in housing and rent itself. We expect that the month-on-month growth rate of the U.S. service industry in 2024 will not be lower than 0.3% (the lowest after 2020 was 0.34% in 2021), which means that this year the year-on-year minimum for service prices will be above 3.8% (February of this year was 4% year-on-year).

A rebound in commodity prices? The rebound in U.S. food prices in the first half of this year is almost inevitable, as expectations of declining production capacity in China have led to a halt and rebound in the prices of metals, coal, and other bulk commodities, while the impact of tariffs will gradually become apparent in the following quarters. According to estimates by the Federal Reserve, the impact of the 20% tariffs imposed by the U.S. on China will be significantly concentrated in the next four quarters, potentially raising year-on-year inflation by 0.5 percentage points.

"Milestones" beyond the benchmark, focusing on liquidity in the second quarter. In our report "Liquidity Challenges in the U.S. in the Second Quarter," we pointed out that in the second quarter, the U.S. may face a relatively fragile liquidity environment at the end of the balance sheet reduction and a peak in debt repayment, with rising refinancing pressure on enterprises, making it likely for a significant jump in credit premiums to occur within the year. If Trump's policy guidance is mishandled, combined with soaring credit risks, the risk of a recession in the U.S. economy will greatly increase.

For the subsequent economic and market trends, two scenarios may emerge: First, the Federal Reserve reacts quickly and takes easing actions, with inflation prevailing again; Second, the Federal Reserve and the White House maintain policy stability, asset prices plummet, and a credit crisis occurs, leading the U.S. economy into recession, which would require more substantial easing. Whether it is proactive easing under inflation or passive substantial easing after a recession, the final result will benefit gold and non-U.S. markets. If there are no "milestones" beyond the benchmark, then in a stagflation environment, gold is also one of the "reference answers."

![](https://mmbiz-qpic.wscn.net/mmbiz_png/zWatvMNHicnejjn8mFJrT7YX6dOwdnA0GljZSWQ67Ha9JcOkTTBoR9mcKpYFSNv2oBeIkDqstMP2DYqHibRyLQ4w/640? Therefore, gold may be the "version answer" for asset selection in the current economic environment. Historically, during two typical "stagflation" periods in the United States: 1974-1975 and 1979-1982, gold performed steadily during "stagflation," especially showing strong performance in the first year of "stagflation."

In recent years, the rise in gold prices has mainly come from some countries shifting their reserves from the US dollar to physical gold, which is harder to sanction. This trend has been strengthening year by year according to a survey by the World Gold Council, driven by the "weaponization" of the dollar by the United States in 2022.

Correspondingly, since 2022, due to the strength of the US stock market, global asset management investors' positions in gold have been declining year by year. Investment and reserves have shown a "this diminishes, that increases" state, but the bullish forces have slightly prevailed, leading to an overall upward fluctuation in gold. As the volatility of the US stock market has increased this year, the trend of replenishing gold positions has become more evident. The world's largest gold ETF—SPDR has started to replenish its holdings since the beginning of the year, with the week of February 22 this year recording a historical second-highest week-on-week increase of 4.79%. The balance of the long-short game may further tilt towards the bulls. We firmly believe that gold remains the optimal choice for "core assets" in this era.

Article authors: Lin Yan, Shao Xiang, Pei Mingnan, Source: Chuan Yue Global Macro, Original title: "US Stagflation as Benchmark, Gold as the 'Version Answer' (Minsheng Macro Lin Yan)"

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