Trump Trade: Consensus and "Anti-Consensus"

Key Points

From the presidential debate on June 27th to the attack on Trump on July 15th, as Trump's advantage in the U.S. election expands, the "Trump trade" intensifies. In this process, we have found that in addition to the mainstream consensus that Trump may "boost inflation," there are also some "counter-consensus" views, some of which are even proposed by Trump himself. Here, we have sorted out the connections and reasons behind these consensuses and "counter-consensuses," hoping to help investors better understand the Trump trade.

Consensus One: Trump's combination of cutting taxes domestically, imposing tariffs externally, and restricting immigration may increase inflation risks.

"Counter-Consensus": The latest Republican Party platform explicitly states to "end inflation," and Trump also stated in an interview with Bloomberg Businessweek that he "cannot accept inflation."

Analysis: Currently, apart from increasing oil production and easing the Russia-Ukraine conflict which may help lower inflation, most of Trump's other major policy directions may increase the risk of high inflation. We believe that "reducing inflation" is more like a statement made by Trump for election purposes to win votes, and the actual implementation may still face significant challenges.

Consensus Two: High inflation may keep U.S. bond rates high in the long term.

"Counter-Consensus": Trump stated in an interview with Bloomberg Businessweek that "low rates" are one of the key words of "Trump economics."

Analysis: Trump's so-called "low rates" may refer more to short-term policy rates, while the market may be more concerned about long-term rates such as the 10-year U.S. Treasury yield. Low short-term rates and high long-term rates are not necessarily contradictory. For example, a significant rate cut by the Federal Reserve may stabilize the U.S. fundamentals more quickly, leading to a relatively higher long-term rate reflecting the fundamentals, steepening the U.S. yield curve. At the same time, we also remind investors that a significant increase in tariffs may drag down U.S. economic growth. If the tax cuts are not significant, it may lead to overall downward risks for the interest rate curve.

Consensus Three: A policy tendency of loose fiscal and monetary policies supports the U.S. fundamentals, trade protection → convergence of the U.S. trade deficit → rising risk aversion, may drive the U.S. dollar higher.

"Counter-Consensus": Trump expressed a desire for a weaker dollar to narrow the trade deficit in an interview with Bloomberg Businessweek. On Wednesday, the dollar fell sharply, with significant gains in the Renminbi, Yen, and others.

Analysis: From the perspective of financial market "common sense," there is a certain contradiction between Trump's MAGA proposition (Make American Great Again) and the expectation of a weaker dollar. Trade protection has historically proven its potential to strengthen the dollar. We believe that "weakening the dollar" and "reducing inflation" are similar, likely just visions of Trump that may ultimately be difficult to achieve. The recent weakening of the dollar is influenced by interest rate trading on one hand, and on the other hand, it is related to the overcrowded long positions on the dollar Consensus Four: Large-scale tax cuts + relaxed regulations are overall beneficial to the US stock market.

"Counter-consensus": In the three trading days after the attack on Trump, the S&P 500 fell by 0.48% and the Nasdaq fell by 2.19% cumulatively.

Analysis: Recently, the decline of US tech giants dragged down the indices, but small-cap stocks represented by the Russell 2000 performed well. We believe that attributing the decline in tech stocks to Trump may not be appropriate. The actual reasons may mainly include four points: ① Interest rate cuts bring about style rebalancing, improved risk appetite drives funds from AI clusters to small-cap stocks, regional banks, biotechnology, and other interest rate-sensitive + lagging assets; ② Bloomberg reported that the Biden administration may sanction some behaviors of Tokyo Electronics, ASML, and other chip supply chain companies, triggering market risk aversion; ③ ASML's performance guidance is lower than market expectations, leading to a general adjustment in the semiconductor industry chain; ④ Previous overcrowding of tech stock positions + unfavorable shift in US stock seasonal effects and other technical factors may increase selling pressure.

Consensus Five: Trump may be re-elected as the next US president.

"Counter-consensus": Due to Trump's polarizing views, it is difficult to attract moderate voters, and recent events may just be "making noise without winning votes."

Analysis: The market believes that Trump's re-election is still a high-probability event, but as Trump's trading evolves, the odds of "anti-Trump trading" are gradually becoming objective. From a cost-benefit perspective, it may also be worth paying attention to.

In summary, when understanding Trump trading, it is necessary to distinguish between policy guidelines, slogans, or visions. When the economic logic behind them cannot be completely unified, we believe there is more reason to use the former as an investment basis. As the election process progresses, the market's "knee-jerk reaction" to Trump trading may have passed halfway, and subsequent attention may focus more on the intensity and pace of specific policy implementation: on the one hand, after the first presidential debate and the attack on Trump, the probability of Trump's re-election has significantly increased, and the probability of the Republican Party winning both houses of Congress also seems not low; on the other hand, the attack incident has greatly enhanced Trump's prestige within the party, coupled with the young MAGA faction J.D. Vance being considered as a running mate, may lead to a more extreme interpretation of Trumpism. For example, in an interview with Bloomberg Businessweek, Trump first proposed considering lowering the corporate tax rate to 15% (previously stated as 20%).

Risk Warning: US inflation exceeds expectations again; geopolitical tensions continue.

Authors: Zhang Jiqiang, Tao Ye, Source: [Huatai Securities Fixed Income Research](https://mp.weixin.qq.com/s?__biz=Mzg2Mjg1NTg3NA==&mid=2247497048&idx=1&sn=b24a9daf249c1f528ed9f52378aa5ce2&chksm=ce03c2f5f9744be3405b447897e626352f4bc2af2671c9f40d09099e5f91d20aac4cfd3e0968&mpshare=1&scene=23&srcid=071914RkMQEhZmuYF5TkNeA2&sharer_shareinfo=883 fa7eaf014ca0ae76082b9c6587dac&sharer_shareinfo_first=883fa7eaf014ca0ae76082b9c6587dac#rd), the original title: "Trump Trade: Consensus and 'Anti-Consensus'"