Investors Are Betting That Trump Will Be the Inflation President

Markets are pricing in accelerated price inflation on the back of the Trump victory.
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Janus' Alankar: Why Trump Presidency Will Be Inflationary

Trump is about to make inflation great again.

The legislative firepower to enact a slew of populist policies has investors betting that more upward price pressures are on the way, whether it be from tighter immigration, trade protectionism, or the enhanced public spending and tax cuts expected of the Republican President-Elect.

"We have added U.S. break-even inflation exposure to the portfolio post the Trump win," said Andrew Harman, portfolio manager at First State Investments Ltd.. "U.S. inflation pressures are expected to be an on-going theme."

Making America's infrastructure "second to none," as Donald Trump promised in his victory speech, comes at a difficult time, as the U.S. is approaching full employment. If the real-estate mogul embarks upon that agenda expeditiously, he risks further stoking wage pressures in the construction sector — an area where workers are already seeing pay grow at a robust clip. As Bloomberg View columnist Conor Sen notes, there's already a dearth of construction labor available, leaving policy makers to decide whether it'd be better deployed "building housing for millennials — the largest adult generation in American history — or building infrastructure." 

Ahead of the election, especially as Trump's odds increased, investors began piling into the iShares TIPS bond exchange-traded fund, which provides exposure to bonds whose principal is adjusted for inflation.

TIP US Equity (iShares TIPS Bond 2016-11-09 10-22-19
Source: Bloomberg

"The level of deficits that are projected under a Trump presidency, as well as the protectionist bias that is arguably inflationary, should weigh on the back end of the U.S. curve and favors some bear-steepening pressure," analysts at Societe Generale SA wrote in a research note. 

The imposition of tariffs against China and Mexico Trump's threatened, if carried out, would likely elicit retaliatory measures against the U.S., further adding to inflationary pressures in the form of a one-off shock, according to analysts at HSBC Holdings Plc.

"A trade war with China and Mexico would constitute a supply shock to the economy, likely raising inflation and lowering aggregate real income," the team led by Kevin Logan wrote in a research note. 

Five-year, five-year inflation swap rates jumped in the wake of the election, hitting levels not seen since July 2015.

FWISUS55 Index (USD Inflation Sw 2016-11-09 11-23-29
Source: Bloomberg

The Treasury yield curve also steepened, with pain expected for longer-dated debt in anticipation of higher inflation down the road.