Fiscal and Tariff Pressures Continue to Dominate the Market
In the second half of 2024, the American financial market will continue to be dominated by high fiscal deficits and evolving tariff policies. The proposed tax reform bill is expected to increase the deficit by $2.4 trillion over the next decade, putting greater supply pressure on the bond market. Meanwhile, tariff negotiations are ongoing and could see changes in July, increasing a wait-and-see atmosphere in the market.
The Trump administration recently reached a preliminary agreement with China on a 55% tariff, and Treasury Secretary Baycent stated there is still room for further negotiations. The market expects that as long as tariffs are clear and stable, business operations will return to a normal pace, but if negotiations prove volatile, it could suppress risk appetite and investment enthusiasm.
Speculation on Federal Reserve Chair Replacement Heats Up, Could Stir Markets
Although Powell's term doesn't end until May 2026, the Trump administration might announce a successor this summer to strengthen its influence over monetary policy. The market generally believes Trump wants to replace the currently hawkish Powell with a more dovish candidate, accelerating the pace of interest rate cuts.
Current hot candidates include former Fed Governor Kevin Warsh, National Economic Council Director Kevin Hassett, and current Governor Christopher Waller. Treasury Secretary Baycent is also on the potential list. He noted that even if a successor has not yet taken office, their public statements could substantively impact the market.
PGIM investment chief Greg Peters believes announcing a chair successor early is extremely rare and could bring market uncertainty and long-term impacts, especially on the upper part of the yield curve. He emphasized that while a Fed chair has only one vote, they have significant influence, and the market will closely watch the successor's policy stance.
Divergence in Rate Cut Expectations Intensifies, Economic Direction Draws Attention
Although May's CPI was lower than expected (up 2.4% year-on-year), Powell insists on holding steady, awaiting more data to confirm whether inflation rebounds. However, there is significant divergence in market expectations for the timing of rate cuts:
- BlackRock: could cut rates in September if the economy weakens;
- Bank of America: unlikely before 2025;
- Mitsubishi UFJ: believes the Fed is overly concerned about an inflation rebound and should currently focus more on the weak labor market and lackluster growth.
In the context of temporary easing of inflation and a mild economy, the market needs to be wary of "bad rate cuts"—those forced by a severe economic downturn, which is not the path the market hopes to see.
Bond Market Volatility May Become the Norm, Yields to Fluctuate Within a Range
The bond market is seen as a key "steering wheel" in the second half of the year. With multiple variables such as tax reform, chair replacement, and tariff negotiations intertwined, the 10-year U.S. Treasury yield is expected to fluctuate widely between 3.75% and 4.625%. Capital will seek higher-yielding assets, temporarily pushing up yields, but ample liquidity will suppress long-term upward trends.
George Goncalves (MUFG) indicated that current signs of slowing economic growth and a weak labor market may force the Fed to act sooner. He questioned why the Fed remains on the sidelines, pointing out that its concern over an inflation rebound "might be a misjudgment."
