Despite easing inflation and the Federal Reserve's interest rate cuts, U.S. financial markets remain highly sensitive to economic surprises. Experts predict increased volatility as investors grapple with Trump's agenda and lingering macro uncertainty.
U.S. financial markets last year were more sensitive to economic surprises than usual, and as Donald Trump prepares to begin his second term as U.S. president investors should buckle up for more of the same in 2025.The 10-year yield’s sensitivity to inflation and activity data surprises last year was the highest in more than 20 years, according to Goldman Sachs.
Although inflation has fallen, growth fears have ebbed, and the Federal Reserve has started cutting interest rates, these sensitivities persist.While equities’ sensitivity to inflation surprises has fallen as price pressures have cooled, it remains high by historical standards. And stocks’ sensitivity to growth surprises, though still modest, has begun to tick up to near pandemic-era levels. What does this mean for the coming year? While benchmark gauges of implied equity and bond volatility are muted, markets are in a more tenuous position than they were a year ago. By many measures, such as pricing, sentiment and valuations, they are extremely stretched. U.S. stocks have never been riding higher or represented a bigger share of the global market cap, and the Fed’s 100 basis points of interest rate cuts since September have been met with a counterintuitive 100-basis-point rise in the 10-year Treasury yield. Does this mean America’s key markets are primed for correction? Maybe. But what’s easier to say with confidence is that we’re going to see wider intra-day trading ranges and short-term reversals as investors contend with the biggest wild card of all: Trump’s agenda. History shows there is a “solid” relationship between macro and market volatility, as Citi’s Stuart Kaiser points out. And with the world still in the dark as to how Trump’s trade and tariff policies will pan out and how the Fed will respond, macro uncertainty is alive and wel
VOLATILITY TRUMP ECONOMY FEDERAL RESERVE MARKETS
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