Fast reading
- The imposition of trade tariffs by the new US administration following the presidential election is among a raft of factors that could potentially drive-up prices.
- The escalation of tensions in the Middle East, which saw Iran fire a barrage of ballistic missiles at Israel on Tuesday night, is an additional concern for policymakers.
The risk that inflation could remain sticky – or even rise again – continued to haunt markets this week. The main catalyst was a US dockworkers’ strike, which briefly closed ports across the eastern seaboard, before a deal was reached on Thursday to suspend industrial action until January to provide time to negotiate a new contract.
Many investors worried that a prolonged strike could have led to a shortage of consumer and industrial goods which, in turn, could drive-up prices and influence the US Federal Reserve’s rate-cutting cycle.
US inflation fell to 2.5% in August, providing space for the Fed to slash interest rates by 50bps in September, beginning its first easing cycle since the Covid-19 pandemic. The US central bank is expected to cut rates again in November, with further cuts forecast next year, and this policy pivot helped propel the S&P 500 and the Eurostoxx 600 to record highs at the end of September.
The People’s Bank of China’s sweeping stimulus programme announced last week, also boosted global stocks, with Hong Kong’s Hang Seng Index rising 18% over the last nine days1.
There is the potential for inflation to persist given the policies both presidential candidates are proposing
However, according to Martin Todd, Portfolio Manager, Federated Hermes Limited, it’s “far from a done deal” that rates are going to continue to fall.
“After the presidential election, there is the potential for inflation to persist given the policies both candidates are proposing. It is certainly not a given that rates will keep falling,” Todd says.
One factor that could increase prices is the imposition of tariffs by the new administration following the election. The Republicans, in particular, have campaigned on aggressively increasing trade tariffs, particularly against China, and many economists anticipate that a second Trump presidency could prove inflationary on the back of a sharp rise in trade tariffs as well as a crackdown on immigration.
“Even a small increase in inflation could influence the Fed and cause it to pause the rate-cutting cycle,” says Ann Ferentino, Senior Portfolio Manager for Fixed Income at Federated Hermes.
An additional concern for policymakers is the further escalation of tensions in the Middle East, which saw Iran fire a barrage of ballistic missiles at Israel on Tuesday night, leading to a sharp spike in the VIX Index, and sending the oil price soaring to above US$75 a barrel2.
Figure 1: Oil price jumps on Iran-Israel conflict fears
Money market flows
The Fed rate cut last month reduced the federal funds rate to a range of 4.75% to 5%%, but predictions that start to the US central bank’s easing cycle would lead to an exodus of assets from liquidity products have been proven wrong, says Deborah Cunningham, Chief Investment Officer for Global Liquidity Markets at Federated Hermes.
Money market funds across the industry have seen inflows of around US$150bn since the Fed cut rates in mid-September3.
“Historically, in a falling-rate environment, yields of cash management products lag the direct security market,” Cunningham says. “This is because some of their holdings have locked in higher rates, and most of those won’t mature until later, at some point in the next 12 months – referred to as a laddered strategy. In contrast, some securities in the direct market – especially overnight securities and those with floating rates – trace Federal Reserve moves immediately, as does the Reverse Repurchase Facility, which now sits at 4.80%.”
“History is only a guide, of course, but we think this will be the case as the easing continues,” she adds.
For further insights on US elections and capital markets please see: Do elections move markets?
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1 Bloomberg as at 3 October
2 Ibid
3 Federated Hermes/iMoneyNet
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