Bond giant Pimco: Trump is "adding fuel to the fire" for the U.S. economy, and risk assets shouldn't celebrate too early

Trump's victory has boosted expectations for corporate tax cuts and regulatory rollbacks, with all three major U.S. stock indices hitting record highs overnight, marking the best weekly performance for U.S. stocks in a year.

But don't celebrate too early. Bond fund giant Pacific Investment Management Company (PIMCO) has issued a warning that Trump's policy plans upon his return could lead to increased inflation and economic overheating, which would hinder the Federal Reserve's rate-cutting process, posing a dangerous signal for the stock market.

PIMCO's Chief Investment Officer Dan Ivascyn stated, "With Trump's victory, the U.S. stock market may experience a reversal after a sharp surge. As the U.S. economy strengthens, Trump's 're-inflation' policies could trigger inflation issues, and risk assets should not be blindly optimistic."

The situation is not as simple as it appears on the surface, nor is it a one-way "re-inflation" trade; risk assets should not be blindly optimistic. You need to be cautious about the outcomes you expect.

Market analysis suggests that if Trump governs as expected, implementing established policies such as increased tariffs, corporate tax cuts, and increased spending, the risk of inflation in the U.S. will further escalate. Ivascyn noted that these policies from Trump, introduced during a strong U.S. economy, could lead to economic overheating.

The timing of Trump's policy introduction coincides with a period of sufficient economic growth momentum, which could lead to economic overheating.

Meanwhile, Trump's victory is changing market expectations for Federal Reserve rate cuts.

Currently, the Federal Reserve has shown signs of slowing its easing pace. A few days ago, the Fed cut rates by 25 basis points as expected. The Fed stated that if the economy remains strong and inflation does not consistently approach 2%, it can reduce policy restrictions more slowly (i.e., cut rates more slowly).

This week's market pricing indicates that traders are beginning to reduce bets on the Fed's easing policy in 2025, expecting less than 100 basis points of rate cuts by the end of next year.

Ivascyn stated that rate cuts may be paused, and the recent surge in U.S. stocks post-election appears fragile. He said:

We believe this means: one should be a bit more cautious about valuing risk assets