MW This strategist says a popular ETF could jump at least 15%. It's a bet inflation will be contained.

By Jamie Chisholm

Trump's tariff and immigration policies won't be very inflationary unless Fed policy gets too loose, says Roth Capital

Early Monday action in futures suggests stocks will add to the previous session's rebound. That's particularly promising for equity bulls given the benchmark 10-year Treasury yield BX:TMUBMUSD10Y, whose recent rise has rattled some traders, is once again eyeing a seven-month high.

Indeed, our call of the day comes from Michael Darda, chief economist and market strategist at Roth Capital Partners, who reckons that Treasurys are overestimating U.S. economic strength, and possibly also the inflation impact of President-elect Donald Trump's mooted policies, and should be bought.

Darda notes that the latest economic optimism that contributed to the fall in bond prices and rise in yields came from last week's news that the Institute for Supply Management manufacturing index improved to 49.3 in December, a level he says is typically associated with real GDP growth of 1.8%.

However, there is a possibility that the strength in the supply-side of the economy is more temporary - as the positive impacts of post-pandemic productivity improvements and an immigration powered labor market start to fade - and this should cause the forces buoying short-term interest rates to dissipate over time.

"The 100 basis points of rate cuts by the FOMC [Federal Open Market Committee] since September were designed in part with this in mind, but recent uncertainty about the thrust of post-election fiscal policy seems to have caused the balance of intellectual gravity on the Fed to re-retreat into data-dependency. Consequently, real rates have jumped, and bond yields have pushed higher," says Darda.

Still, investor inflation expectations have risen only modestly of late and remain at "the low end of a range consistent with price stability," he adds. In fact, much of the rise in Treasury yields since the fall is due to increased term premia - the extra yield demanded by investors for longer-dated paper, apparently as concerns about the widening U.S. budget deficit increase.

Furthermore, Darda says that Trump's proposed higher tariffs, and tougher immigration stance that would slow labor force growth, "are not capable of raising the price level in a sustained way absent excess money creation (a sub-neutral policy rate) by the Fed." Comments over the weekend from former Fed Chairman Ben Bernanke chimed with this assessment.

And so, with the Fed now seemingly on pause, any tariff or labor force shock may be more of a threat to corporate profit margins and earnings expectations, thereby hurting stocks, than to price stability, which would hit bonds.

"This brings us to our 'trade' which is to go long the iShares 20-year Treasury Bond ETF TLT as the 10-year Treasury yield remains 'decoupled' from the level of macro surprises in a way that suggests 15% plus upside from here," says Darda

The main risk to his trade is if the economy strengthened to a surprising degree. "However, the current rate structure already seems to have priced in such an eventuality," he says.

Markets

U.S. stock-index futures (ES00) (YM00) (NQ00) are higher even as benchmark Treasury yields BX:TMUBMUSD10Y rise. The dollar index DXY is lower, while oil prices (CL.1) slip and gold (GC00) is trading around $2,631 an ounce.

   Key asset performance                                                Last       5d      1m      YTD    1y 
   S&P 500                                                              5942.47    -0.48%  -2.43%  1.03%  26.51% 
   Nasdaq Composite                                                     19,621.68  -0.51%  -1.20%  1.61%  35.10% 
   10-year Treasury                                                     4.616      7.30    41.30   4.00   58.46 
   Gold                                                                 2643.9     0.91%   -1.46%  0.17%  29.98% 
   Oil                                                                  73.95      3.96%   8.51%   2.89%  4.27% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

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The buzz

The Washington Post reported that Trump aides are working on more targeted tariffs rather than across-the-board 10% to 20% increases.

U.S. economic data due on Monday include the S&P final U.S. services PMI for December at 9:45 a.m. Eastern, followed at 10:00 a.m. by November factory orders.

The Treasury will announce the result of a $58 billion auction of 3-year notes at 1:00 p.m.

President Joe Biden announced an offshore oil drilling ban.

Paychex $(PAYX)$ is in advanced talks to acquire Paycor HCM $(PYCR)$, a smaller rival in payroll processing, according to a Bloomberg report.

Canadian Prime Minister Justin Trudeau may resign on Monday, according to reports.

Omeed Malik's special purpose acquisition company Colombier Acquisition Corp. II has agreed to merge with online firearms retailer GrabAGun, according to Bloomberg.

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The message

Here's an interesting message from OpenAI's CEO Sam Altman. Does this mean that the infrastructure and energy required to support AI demand is more than expected? It suggests prices may have to rise.

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   TSLA    Tesla 
   NVDA    Nvidia 
   GME     GameStop 
   TSM     Taiwan Semiconductor Manufacturing 
   HOLO    MicroCloud Hologram 
   PLTR    Palantir 
   MSTR    MicroStrategy 
   AMD     Advanced Micro Devices 
   RGTI    Rigetti Computing 
   AAPL    Apple 

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-Jamie Chisholm

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January 06, 2025 06:42 ET (11:42 GMT)

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