Financial markets and official economic indicators over the past few weeks give policymakers around the world plenty to contemplate. Was the recent spike in bond yields a sufficient warning to Donald Trump and his team, or will they still follow through with inflationary stimulus, tariff, and immigration policies?
LONDON – As Donald Trump returns to the White House, signals from the bond market are bursting out of the specialist world of financial geeks to become a major news item and a central concern for policymakers. One is reminded of the Democratic strategist James Carville’s famous quip, during Bill Clinton’s presidency, that if he could be reincarnated, he would “like to come back as the bond market. You can intimidate everybody.”
He may not like it, but Trump must now ask himself how bond markets will respond if he follows through on some of his stated policy preferences or continues to behave as erratically in office as he did on the campaign trail. There are two big reasons why Trump and his advisers should be concerned.
First, while the market’s immediate reaction to the presidential election seemed to reflect heightened optimism about the US economy’s growth prospects, the euphoria was short-lived. Though bond yields were already rising, most observers associated this with the improved mood about growth and accelerated rise in US equity prices. But since mid-December, the rise in US bond yields – a trend that has accelerated since the release of the latest US non-farm payroll report, on January 10 – has started to weigh on equities, which entered the new year on a down note.
As I have noted in past years, a good rule of thumb holds that if the S&P index is down for the first five trading days of a new year, there is a 50% chance that the market will end up down for the year. Well, after ending those first five days just about in positive territory, US stocks have become quite choppy and remain very susceptible to rising bond yields. If January ends up being a down month, that does not bode well for Trump’s first year – at least when it comes to the stock market (one of his preferred metrics of success).
Second, US payroll numbers remain strong, adding to the evidence of a persistently robust economic cycle that could pose problems for the new administration. After its December meeting, the US Federal Reserve Board made clear that it now expects to cut rates only twice in 2025, whereas previously it had issued guidance implying four cuts. Then, adding to the bond investors’ fears of persistent inflation and tighter-than-expected monetary policies, the University of Michigan’s five-year inflation expectations survey surprisingly rose to 3.3% this month, from 2.8% in December.
The Michigan survey is a very important indicator. I have followed it closely for much of my career, not least because I know that many important people at the Fed do the same. The implication of such a large jump is that ordinary Americans may also have serious concerns about some aspects of the new administration’s economic program. The news will not have gone unnoticed by Treasury Secretary-designate Scott Bessent and the rest of Trump’s economic advisers. Of course, the news that core consumer price inflation (excluding food and energy prices) slowed mildly in December has brought some relief to bond markets. But it is anyone’s guess how long this will last.
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In any case, financial markets and official economic indicators over the past few weeks give policymakers around the world plenty to contemplate. Were the recent bond-market alarm bells a sufficient warning to Trump and his team, or will they still pursue large-scale stimulus in the form of a tax cut, across-the-board import tariffs, and a crackdown on immigration? As I wrote in November, most economists would describe this as an inflationary agenda. And now, it appears that ordinary Americans and bond markets agree.
Given the importance of US financial markets to the global economy, these concerns are not confined to American shores. Rising bond yields, weakening equities, and declining currencies are already defining characteristics of many other economies in 2025. Here in the United Kingdom – which is probably not unique – many commentators see the recent moves in bond and equity markets as a big thumbs down to the current government.
Of course, bond markets’ role in circumscribing economic policymaking is not new. While some governments must pay close attention to such market developments, others can sometimes get away with regarding them as an inconvenience. In the latter case, if the authorities believe that their policy framework is appropriate, it would be a mistake to change course radically at the first sign of external pressure.
But if the pressure continues to grow, the situation could change. While the US arguably needs tighter overall financial conditions, the same cannot be said of many other economies around the world – from the UK and the rest of Europe to China and beyond.
The bond markets are watching. Trump and Bessent should consider themselves warned.
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Financial markets and official economic indicators over the past few weeks give policymakers around the world plenty to contemplate. Was the recent spike in bond yields a sufficient warning to Donald Trump and his team, or will they still follow through with inflationary stimulus, tariff, and immigration policies?
wonders if recent market signals will keep the new administration’s radicalism in check.
LONDON – As Donald Trump returns to the White House, signals from the bond market are bursting out of the specialist world of financial geeks to become a major news item and a central concern for policymakers. One is reminded of the Democratic strategist James Carville’s famous quip, during Bill Clinton’s presidency, that if he could be reincarnated, he would “like to come back as the bond market. You can intimidate everybody.”
He may not like it, but Trump must now ask himself how bond markets will respond if he follows through on some of his stated policy preferences or continues to behave as erratically in office as he did on the campaign trail. There are two big reasons why Trump and his advisers should be concerned.
First, while the market’s immediate reaction to the presidential election seemed to reflect heightened optimism about the US economy’s growth prospects, the euphoria was short-lived. Though bond yields were already rising, most observers associated this with the improved mood about growth and accelerated rise in US equity prices. But since mid-December, the rise in US bond yields – a trend that has accelerated since the release of the latest US non-farm payroll report, on January 10 – has started to weigh on equities, which entered the new year on a down note.
As I have noted in past years, a good rule of thumb holds that if the S&P index is down for the first five trading days of a new year, there is a 50% chance that the market will end up down for the year. Well, after ending those first five days just about in positive territory, US stocks have become quite choppy and remain very susceptible to rising bond yields. If January ends up being a down month, that does not bode well for Trump’s first year – at least when it comes to the stock market (one of his preferred metrics of success).
Second, US payroll numbers remain strong, adding to the evidence of a persistently robust economic cycle that could pose problems for the new administration. After its December meeting, the US Federal Reserve Board made clear that it now expects to cut rates only twice in 2025, whereas previously it had issued guidance implying four cuts. Then, adding to the bond investors’ fears of persistent inflation and tighter-than-expected monetary policies, the University of Michigan’s five-year inflation expectations survey surprisingly rose to 3.3% this month, from 2.8% in December.
The Michigan survey is a very important indicator. I have followed it closely for much of my career, not least because I know that many important people at the Fed do the same. The implication of such a large jump is that ordinary Americans may also have serious concerns about some aspects of the new administration’s economic program. The news will not have gone unnoticed by Treasury Secretary-designate Scott Bessent and the rest of Trump’s economic advisers. Of course, the news that core consumer price inflation (excluding food and energy prices) slowed mildly in December has brought some relief to bond markets. But it is anyone’s guess how long this will last.
Secure your copy of PS Quarterly: The Year Ahead 2025
Our annual flagship magazine, PS Quarterly: The Year Ahead 2025, has arrived. To gain digital access to all of the magazine’s content, and receive your print copy, subscribe to PS Digital Plus now.
Subscribe Now
In any case, financial markets and official economic indicators over the past few weeks give policymakers around the world plenty to contemplate. Were the recent bond-market alarm bells a sufficient warning to Trump and his team, or will they still pursue large-scale stimulus in the form of a tax cut, across-the-board import tariffs, and a crackdown on immigration? As I wrote in November, most economists would describe this as an inflationary agenda. And now, it appears that ordinary Americans and bond markets agree.
Given the importance of US financial markets to the global economy, these concerns are not confined to American shores. Rising bond yields, weakening equities, and declining currencies are already defining characteristics of many other economies in 2025. Here in the United Kingdom – which is probably not unique – many commentators see the recent moves in bond and equity markets as a big thumbs down to the current government.
Of course, bond markets’ role in circumscribing economic policymaking is not new. While some governments must pay close attention to such market developments, others can sometimes get away with regarding them as an inconvenience. In the latter case, if the authorities believe that their policy framework is appropriate, it would be a mistake to change course radically at the first sign of external pressure.
But if the pressure continues to grow, the situation could change. While the US arguably needs tighter overall financial conditions, the same cannot be said of many other economies around the world – from the UK and the rest of Europe to China and beyond.
The bond markets are watching. Trump and Bessent should consider themselves warned.