CIBC Senior Economist Katherine Judge interviews Chief Economist Avery Shenfeld about his take on Trump’s nominees, and what signals can be gleaned about the risk to the bond market from rising deficits, and the risks to inflation and trade from tariffs.
Introduction: Welcome to Eyes on the Economy by CIBC Capital Markets, a podcast series dedicated to addressing current issues in a concise format, helping to make sense of the evolving economic complexities, so that you can take action.
Katherine: Thanks everyone for joining us. I’m Katherine Judge, a senior economist at CIBC. I’m joined by Avery Shenfeld, CIBC’s chief economist, to talk about his thoughts on the implications of the US election result for financial markets. Avery, welcome. In the days immediately before and after the US election, we saw a bit of a sell-off in treasuries.
Avery Shenfeld: Nice to be here.
Katherine: Some of that was on stronger data, but much of it seemed to be tied to fears of larger deficits under a Trump presidency. That could hit long rates through larger financing requirements, but also provide stimulus that substitutes for Fed rate cuts. What’s prompted the rally that we’ve seen more recently, which undid some of that upward move in long yields?
Okay.
Avery Shenfeld: I think the rally that we’ve seen and the little bit of a calming of the waters and treasuries is really tied to some of the Trump appointees that we’ve seen. That’s given some reassurance that maybe deficits won’t blow up as much as feared because on the data front, it’s sort of been more mixed. We had a bit of a disappointment in terms of the core CPI and core PCE price index. They weren’t maybe quite as soft as people assumed.
We still have some Fed people talking about maybe that they’d pause on rate cuts. So it’s really more been a little bit of a relief rally on the fear of massive borrowing requirements driving up long-term rates.
Katherine: So Trump didn’t talk much about federal deficits and debt on the campaign trail, but what can we glean from those who he has named to key cabinet and White House positions so far?
Avery Shenfeld: Well, the biggest rally that we saw on treasuries or the best day for treasuries really came after the Treasury Secretary or the nominee for Treasury Secretary, Scott Besant, was announced. And if you look into his record, he certainly does look like someone who’s not going to stand, Pat, and allow deficits to explode from here. He, himself, has talked about a 3 % deficit to GDP target.
That’s less than half of where we’re currently running. So that would certainly be quite an accomplishment if we got there. But there’s been some other perhaps not quite as noticed appointments that also lean the same way. the incoming budget chief, Russ Vaught, wrote the section on the Office of Management Budget in Project 2025. He’s called the current deficit path as an untenable fiscal situation. He’s advocated pay as you go processes that
had been instituted in an earlier Republican administration that seemed to actually force Congress hands towards spending relief. And then of course, we have the appointments of Elon Musk and Vivek Ramaswamy. I’m not really sure whether the Doge, that new off White House department that’s supposed to look for spending cuts will really have a lot of political clout. It’s not a cabinet level appointment. But that said, the fact that Trump was willing to name these two
to go out and hunt for, in Musk’s view, trillions in spending cuts indicates that Trump himself must be somewhat sympathetic to the idea that spending could be chopped. So he didn’t campaign on that, but it does certainly look like that. And then in addition to all of that, we of course have some people in Congress who seem to lean towards some spending cuts. So the new, for example, leader of the Republicans in the Senate, Senator Thune,
I think leans towards being a fiscal conservative. And we do have to remember that the House GOP caucus is replete with those who dumped the previous House GOP leader on the grounds that he wasn’t being tough enough on spending. those more fiscally conservative Republicans are still there to lean against huge budget deficits. So even though they may favor tax cuts, they also want to do some spending chopping.
Avery Shenfeld: They may also want to cut back some of the tax subsidies for green energy. So I think that financial markets have a reason to be a little calmer in terms of the fear of big deficits.
Katherine: And the other major political uncertainty, of course, is whether Canada and other trading partners will be hit by tariffs and whether the US might be hit by stagflation if we get US tariffs and then retaliatory tariffs from other countries. So can we get any clues on that front from who Trump has nominated?
Avery Shenfeld: Well, I wish we could say we do have those clues, but I think the reality is if you look across, again, the same list of characters who have been given nominations, both in terms of trade policy, but White House policy advisors and so on, it’s a very mixed bag. So within the cabinet, there are certainly those, and I would say that new Treasury secretaries among them, who might go for some modest tariffs, but are not really looking for massive tariffs.
and are really talking about using tariffs to force other countries to lower their tariffs. So as a starting point really for trade negotiations that ultimately protect two-way free trade. But I think the reality is when I look across the rest of the cabinet, I see a lot of new right believers and I put the vice president, for example, in that camp. People who believe that tariffs will help revitalize US manufacturing want these heavy tariffs on
across the board on competitors to the US manufacturing sector, or some who see tariffs as a way to generate a lot of revenue for the government that they could use to finance other tax cuts. So there are true believers there in tariffs. And I guess my big fear is that maybe Donald Trump himself is one of those true believers in tariffs. Certainly we’ve seen before he’s even taken up his chair in the Oval Office,
We’ve seen him not only threaten Canada and Mexico with 25 % tariffs over border issues, nothing to do with trade, but just in the past few days, he talked about 100 % tariff on China and some of the BRIC countries if they go ahead and launch a new currency. So tariffs seem to be still very much on Donald Trump’s mind. And I think the reality is that while we do have some clues on fiscal policy,
and that those clues have been comforting to the bond market. To the extent that long-term interest rates are pricing in the threat from tariffs to inflation, we really don’t have the all-clear signal yet. I think we may end up having to wait until Trump is actually in office for a month or two before we get any clarity on that front that could really open up a lot more room for a bond market rally and, of course, provide some size of relief for those of us in Canada.
Katherine: Great, thanks for the insight Avery. And thanks to our clients for tuning into this edition of our CIBC Economics podcast. Until next time, we’ll be keeping our eyes on the economy and calling it as we see it.
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