Trump's habitual flip-flopping, the market chooses to selectively believe
Trump has changed his stance again, stating that the U.S. and China may reach a trade agreement, and denying any consideration of firing Federal Reserve Chairman Powell. Market risk appetite has risen, gold has fallen, and dollar assets have rebounded. Although uncertainty surrounding Trump's policies remains, concerns about a Federal Reserve rate cut have eased, with the market primarily focused on the progress of trade negotiations. The importance of U.S. Treasuries remains prominent, and the differentiation in the market for dollar assets may have just begun
The capricious Trump has once again changed his tune, stating not only that a trade agreement between China and the U.S. may be reached but also clearly indicating that he has never considered firing Federal Reserve Chairman Jerome Powell. As a result, market risk appetite has risen again, and gold has significantly declined. Meanwhile, the previously battered dollar assets have rebounded.
The key point of market indecision is the uncertainty of Trump's policies, but his personality means that this uncertainty will become the norm. Under the pressure of declines in stocks, bonds, and currencies, Trump has made some adjustments to his previously hardline policies, reminiscent of his first term's frequent "we have a deal" or "we had a call" statements. Fundamentally, he does not want to see significant fluctuations in the capital markets represented by U.S. stocks.
The basic judgment of the market remains that high tariffs will exist for the long term, and the stability of any so-called trade agreement still raises considerable doubts. Conversely, whether Powell will be fired is not something that many investors are genuinely worried about. Firstly, Powell's term is set to expire in January next year, and before that, Trump will likely determine whether he will stay on and will also consider potential successors. Meanwhile, he and Powell had a confrontation in 2019 over whether to cut interest rates, and ultimately Powell chose to yield. From this perspective, Powell's insistence on the independence of the Federal Reserve serves his own interests (especially if he does not remain, he can leave with a good reputation). At the same time, the Federal Reserve still needs to wait for more data to confirm the interest rate cut path—because once rate cuts begin, the future cuts could be substantial. This aligns with the market's current expectation of "cut later, but potentially bigger."
From this angle, the market does not need to worry about whether the Federal Reserve will cut rates, but it is still filled with concerns about trade negotiations. If trade talks continue to show no progress, the selling of dollar assets by overseas investors may escalate again. In other words, under external uncertainty, supportive internal monetary and fiscal policies will be a global phenomenon.
For dollar assets, their differentiation may just be beginning. As the cornerstone of dollar assets, U.S. Treasuries are undeniably important. Even though there have been rumors of overseas investors selling U.S. Treasuries, their yields have remained relatively stable. Aside from the ultra-long 30-year Treasuries, the yields on 2-year and 10-year Treasuries are generally trending downward in 2025, which indicates that although the Federal Reserve has not started cutting rates, there is still an official put option in place, meaning the market believes the U.S. Treasury and the Federal Reserve have sufficient means to stabilize Treasury yields. However, views on the dollar are relatively complex; the Trump administration hopes to force the currencies of trade opponents to appreciate during negotiations while also wanting the dollar to remain strong to ensure its position in the international financial system. At the same time, countries impacted by tariffs also have both subjective and objective needs for depreciation Therefore, whether the US dollar index, which is primarily based on the exchange rates of the euro, yen, and pound, remains representative is somewhat questionable.
For US stocks, the differentiation may be more pronounced. Fundamentally, US stocks represent the performance of the US economy. Recently, analysts have continuously lowered their outlook for the US economy, and the market believes that the impact of tariffs has yet to be realized, while the risk of a recession in the US economy is also rising. This has led to the highest-valued tech stocks being sold off first. Since US Treasury yields remain high, this also puts pressure on high-valuation sectors. There is considerable uncertainty about whether overseas funds will reduce their holdings in US stocks. However, ultimately, the performance of US stocks still depends on the performance of the US economy and listed companies, which can only be confirmed after the tariffs are implemented, and the progress of trade negotiations may not be shorter than the currently set 90-day deadline.
Overall, Trump's habitual "flip-flopping" has not provided the market with the certainty it seeks, and investors will continue to look for assets with a margin of safety, as evidenced by the strong performance of gold. As for US Treasuries, the US dollar, and US stocks, differentiation may become a new normal.
Authors: Zhou Hao, Huang Kaihong, Source: GTJAI Macro Research, Original Title: "[Guotai Junan International Macro] Trump's Habitual Flip-Flop, the Market Chooses to Selectively Believe"
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