President-elect Donald Trump ’s allies are celebrating how markets have responded to his reelection. The stock market is soaring, bitcoin is at an all-time high and the dollar is surging against foreign currencies. But the market’s jubilation at the prospects of lower taxes and lighter regulation has been softened by lingering concerns about how inflation could accelerate if Trump follows through on pledges that ignite trade wars or weaken the supply of immigrant labor. There was a temptation during the campaign to dismiss elements of Trump’s protectionist agenda as bluster. His early personnel selections suggest he’s pretty damn serious. Stephen Miller , a longtime Trump ally and an architect of the 2017 travel ban from several majority-Muslim countries, is returning to the White House as the deputy chief of staff for policy. News of Miller’s appointment on Monday landed shortly after former acting Immigration and Customs Enforcement Director Tom Homan was named as the administration’s “border czar” to oversee the “Deportation of Illegal Aliens back to their Country of Origin,” Trump posted on Truth Social. In an appearance on “Fox & Friends,” Homan said Americans can expect “a hell of a lot more” deportations this time, Emmy Martin reports. Why does that matter for Wall Street?: The Trump transition’s early focus on bringing immigration hardliners back to the White House comes as investors pour money into “reflationary” trades that anticipate inflation ticking higher. Trump’s stance on tariffs and immigration “tilt the risks decisively toward a comeback of inflation in 2025,” Markets Policy Partners’ John Fagan, Brendan Walsh and Bob Dewey wrote in a research note this week. Goldman Sachs analysts reported that “markets have priced one of the largest month-on-month reflationary shifts since 2000,” in a research note. The reflationary repricing of assets was driven by favorable economic news — the economy is still growing at a healthy clip — and was then “boosted by the Republican results in the US elections this week.” If Trump’s immigration policy is as advertised, the accompanying reduction of the labor pool would create inflation, former George W. Bush administration economist Douglas Holtz-Eakin told MM. The one-time Congressional Budget Office director once estimated that mass deportations on the scale Trump has proposed could cost as much as $600 billion in federal resources and erase around $1.6 trillion from the economy. The effect on markets would depend on both the “size” of the policy and its timing, and Holtz-Eakin said “the timing might be a long ways away.” What’s more, even with immigration hardliners like Miller and Homan in the White House, finding and deporting millions of undocumented immigrants would require authorities “to go house to house — business to business —and that’s a severe disruption of the social and business fabric,” Holtz-Eakin said. The political and economic backlash to the White House could be severe. Trump, for his part, said last week there’s “no price tag ” for his immigration plans and that he has “no choice” but to follow through. The expectation that his policies could cause inflation to accelerate in the coming years has already triggered a sell-off in 10-year Treasury notes, pushing yields higher. In the long term, higher yields on longer-dated government debt securities can drive up the rates for mortgages and corporate bonds. Right now, investors are “not pricing in stable inflation and rates coming down – not so far,” Holtz-Eakin said. Key caveat: New immigrants helped increase the U.S. economy’s supply of workers when tight labor market conditions were contributing to inflation last year. Labor demand has fallen since then and hiring has slowed. Immigration is expected to decline with Trump in office and, even if mass deportations don’t come to fruition, the slowdown is unlikely to be inflationary, Eric Wallerstein, the chief markets strategist at Yardeni Research, told MM “Unemployment is rising for workers who compete directly with recent or unskilled immigrant workers, which means there’s some slack in the unskilled part of the labor market,” Wallerstein said. “I’m less concerned about wage pressures resulting from lower immigration.” IT’S TUESDAY — Send suggestions and tips to ssutton@politico.com and @samjsutton.
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