Key Takeaways
This week ushers in Donald Trump’s second term as president, with his inauguration on Jan. 20 aligning with the U.S. stock market’s closure for Martin Luther King Jr. Day.
Trump’s inauguration marks a pivotal moment for the U.S. and global markets.
With U.S. stock markets closed for Martin Luther King Jr. Day, all eyes will be on the post-inauguration policy announcements expected to follow. The announcements could provide much-needed clarity but also introduce volatility.
Barclays analysts noted , “This week could bring volatility, but for now, U.S. inflation and retail sales paint a benign macro picture.”
Leading up to the inauguration, the U.S. dollar and Treasury yields have pulled back from last Monday’s dizzying heights, concluding last week on a milder note and easing pressures on Asian emerging markets.
After reaching a 16-month peak, the 10-year Treasury yield ended the week with a 17-basis-point drop, while the dollar index saw its second weekly loss in sixteen weeks.
With U.S. markets closed, global liquidity is expected to thin, prompting cautious trading.
Stephen Innes, Managing Partner at SPI Asset Management, commented, “Investors have been initially receptive to the more market-friendly proposals in Trump’s anticipated agenda, such as tax cuts and deregulation, which have sparked rallies.”
However, he noted that potential disruptive policies like tariffs and deportations could reintroduce inflationary pressures and disrupt the Federal Reserve’s rate-cutting trajectory.
Innes added, “His [Trump’s] inauguration speech is poised to sway markets significantly, packed as it may be with crucial policy announcements, directives, and a slew of executive orders.”
The BoJ’s two-day meeting wraps up on Friday, with markets widely expecting a 25 basis point rate hike to 0.5%. Expectations for the hike have surged to 85% in the past week, bolstered by BoJ officials’ growing confidence in wage growth acceleration.
Alongside the decision, the BoJ will also release its updated outlook report. Experts see the bank raising its inflation forecasts as both core inflation measures.
However, analysts believe the BoJ will aim to avoid a hawkish surprise, mindful of the market turbulence caused by its actions in July.
Consequently, the yen may stay under downward pressure. Markets pricing in a gradual policy rate increase to around 1% over the next two years may hit the currency.