Wells Fargo Macro Strategy Head Warns of Intensifying Risk Premium Amid Trade Uncertainty

Client Behavior Amid Uncertainty

• clients are currently hesitant to make significant business or investment decisions due to unclear rules and extraordinary volatility.
• 🎯 They are waiting for more clarity from President Trump regarding his specific objectives with tariffs, such as revenue generation or targeting specific items like fentanyl.

CPI Print and Federal Reserve Outlook

• 📊 The upcoming CPI print is seen as interesting, with little data from February in effect.
• 📉 Markets desire a benign or weaker CPI number to provide relief and potentially allow the Fed to act, though the Fed is currently in a difficult position.
• ⚠️ The speaker believes the Fed needs to see at least a couple of months of decent inflation data before considering any action, likely pushing any potential rate cut to July at the earliest.

Market Expectations vs. Fed Reality

• 📈 Market pricing for two rate cuts in the second half of the year is considered potentially incorrect, as the market seems to anticipate Fed action sooner than the data supports.
• ⏳ The speaker disagrees with the market's assumption that the Fed is ready to act, emphasizing the need for better inflation data.

Prolonged Volatility and Risk Premium

• 🎢 Elevated volatility, evidenced by a high VIX and volatility in fixed income and FX markets, is expected to continue for a prolonged period.
• ⚠️ This sustained volatility is attributed to the growing realization that a sustained trade war might be a reality, which has historically not ended well.
• ⚡ The primary idea discussed for the past month is that the risk premium should increase, and this is now being observed across markets, including equities, fixed income, and corporate spreads.