Unlock the White House Watch newsletter for free
A guide to what the 2024 US election means for Washington and the world.
Pimco, one of the world’s largest bond fund managers, has warned that US President-elect Donald Trump’s economic plans could lead to the economy “overheating” and halt interest rate cuts. He warned that stock prices, which have skyrocketed in response, may be at risk. victory in the presidential election.
Pimco Chief Investment Officer Dan Ivascyn said the U.S. stock market could suffer a reversal after surging on confidence of a Republican candidate’s victory. The S&P and Nasdaq Composite Index both hit record highs this week on expectations for tax cuts, deregulation and trade tariffs.
But he warned that such a “reflationary” policy could lead to inflation in a U.S. economy that already has “significant momentum.”
“It’s not as simple and easy as a one-way reflation trade, which risk assets should be happy about,” Ivascyn told the Financial Times.
“Be a little careful about what you wish for,” he said. With U.S. inflation still above the Federal Reserve’s target, “there is some risk that some of this excitement will slip back into both inflation expectations and actual inflation.”
He said President Trump’s policies were “introduced at a time when there is already plenty of positive growth momentum and could lead to this overheating.”
Ivascyn’s comments join some other investors and strategists who say the reaction across risky asset classes to this week’s election results is at odds with rising inflation and the possibility of an extended period of tight monetary policy. It reflects the concern. Expectations about the direction of US interest rates have been a major driver of US markets in recent years.
The S&P 500 index rose more than 4% this week, putting it on track for its biggest weekly gain this year, while President Trump’s victory also sent Bitcoin to an all-time high, a premium paid by lower-grade borrowers. Junk bond spreads also rose. Issuance of government bonds exceeds that of the Ministry of Finance, reaching the lowest level in 17 years.
But Treasuries were sold off sharply earlier this week, initially on hopes of higher inflation, but then after Fed Chairman Jay Powell said it was too early to know what President Trump’s policies would be. , the 10-year bond recouped its losses.
Although Ivascyn didn’t expect “significant inflation,” he said Trump’s policies could support growth in the long run. There is a definite possibility that it will return to 2020.” of the cut.”
“I think that means we need to be a little bit more careful in valuing risk assets here,” he said.
The central bank has already begun to ease the pace of monetary easing after a spate of positive economic data released in recent weeks, despite a weak October jobs report distorted by strikes and hurricanes.
The government cut the policy rate by 0.25% on Thursday towards its target range of 4.5% to 4.75%, and most recently in September cut it by half a percentage point for the first time since 2020.
This week’s market prices show that traders are also starting to scale back their bets on Fed easing in 2025, and expect rate cuts to be less than 1 percentage point by the end of next year.
Ivascyn said ahead of the Fed’s announcement that the “bar is high” for raising interest rates, but that “a more realistic scenario would be for policy to remain in place much longer than people think.”
That’s not “a favorable scenario for the commercial real estate market,” he said. “That could create problems for some sectors that have been rallying recently in anticipation of central bank interest rate cuts.”
Still, even before central bank policymakers need to intervene, Ivascyn said, “the market often does the heavy lifting for the Fed.” That means markets may start pricing in changes in the outlook for inflation and interest rates. Central banks need to make this known.
Ivascyn said bets on rising inflation and interest rates could at some point push yields on U.S. Treasuries to a level where they compete with stocks as an attractive investment, making them less attractive.
“There are real limits to how high interest rates can rise before they start to have a negative impact on risk assets,” he said. “That’s part of the reason for this positive market sentiment and positive economic momentum. This could lead to a reversal of the situation.”
“The market will become a kind of ruler.”
