"Trump Trade" is stalled, market focus back on two major heavyweights

With Vice President Kamala Harris gaining support within the Democratic Party, bond traders are reevaluating the so-called Trump trade, weighing political turmoil against upcoming economic data releases and the future direction of US interest rates.

As trading volume increased during Monday's midday session in New York, yields on US Treasuries across all maturities rose by three to five basis points. These fluctuations set the stage for a series of US Treasury auctions this week, reports on US economic growth, and the release of inflation indicators favored by the Federal Reserve.

George Catrambone, head of the Fixed Income Department at DWS Americas, said, "Investors should refocus on fundamentals and Federal Reserve policy. While markets may fluctuate due to political news, trading around elections is often a foolish behavior."

Trading in the US Treasury market over the weekend showed that investors had already begun preparing for Biden's decision not to seek reelection. This was reflected in a slight flattening of the US yield curve, signaling a loss of momentum in the bet on rising bond yields, known as the "Trump trade," which was seen as benefiting from Trump's advocacy of loose fiscal policies, higher trade tariffs, and weakened regulations.

With about three months left in the election campaign, some traders believe that Biden's withdrawal could lead to more intense competition. Harris has quickly solidified support from key figures in the Democratic Party for her presidential campaign, indicating that her path to nomination is clear.

However, despite the market volatility triggered by the election, the main drivers of yields remain speculation on the extent of economic slowdown and to what extent it will compel the Federal Reserve to begin its easing cycle.

Scott Buchta, head of Fixed Income Strategy at Brean Capital, said, "The election is indeed important in certain corners of the market, such as currencies, but the bond market is currently mainly driven by US economic data and the Fed."

Investors expect at least two 25-basis-point rate cuts by the end of 2024 starting from September. Fed policymakers are expected to keep the key rate unchanged for the eighth consecutive time at the FOMC meeting next week, marking a year since they first reached the current 5.25% to 5.5% target range. Ahead of the monetary policy statement on July 31, Fed officials will be in a blackout period and will not comment on monetary policy.

Important economic data will be released later this week, with the US second-quarter Gross Domestic Product (GDP) scheduled for Thursday. This will be followed by the latest update on the Fed's preferred core inflation measure, the Personal Consumption Expenditures (PCE) price index, on Friday.

Earlier this month, consumer prices unexpectedly fell in June driven by the services sector, and the latest core PCE year-on-year growth rate is expected to decline from 2.6% in May to 2.5%. These data will be released before the Fed's meeting in July, and investors will closely watch the meeting for any clues on the timing of a Fed rate cut Wisdomtree's Head of Fixed Income Strategy, Kevin Flanagan, said, "We seem to have a clearer understanding of monetary policy rather than potential fiscal policy." In his view, the policy statement from Federal Reserve officials next week is crucial. He stated, "From a political perspective, there are too many unknowns."