Trump returns to the White House this week as dollar jumps on rising Treasury yields

President-elect Donald Trump, who is due to be sworn in on Monday, has promised sweeping tariffs and mass deportations of illegal immigrants, policies that economists warn will drive up material prices and lead to a shortage of workers, making growth in home construction and factory output likely unsustainable.

(One-hour chart of the US dollar index)

foreign exchange trading platformThe North American economist said: "We expect that under the new Trump administration, a range of factors affecting the construction industry workforce, such as tariffs on construction materials and stricter immigration rules, as well as a glut of new homes for sale in some regions, will prevent builders from launching new projects in the second half of this year and even in 2026, leading to a decline in housing starts."

The U.S. Department of Commerce's Bureau of Statistics said that single-family housing starts, which account for the main body of residential construction, rose 3.3% month-on-month in December, and the seasonally adjusted annual rate was 1.05 million units, the highest level since February 2024. Single-family housing starts fell 2.6% year-on-year.

Volatile multifamily housing starts surged 58.9% month-on-month to an annual rate of 418,000 units. Overall housing starts jumped 15.8% month-on-month to an annual rate of 1.499 million units, the highest level since February last year. Economists polled by Reuters had expected housing starts to rise to 1.32 million units.

Multifamily housing starts fell 4.4% year-on-year. Housing starts in 2024 are estimated at 1.364 million units, down 3.9% from 2023. Single-family home construction permits rose 1.6% month-on-month in December, at an annual rate of 992,000 units.

Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, said: "The high level of unsold inventory of new homes on builders' books suggests that any eventual pickup in demand will have only a marginal impact on construction activity when mortgage rates finally fall."

Multi-family building permits fell 5.8% month-on-month to an annual rate of 437,000 units. Overall building permits fell 0.7% month-on-month to an annual rate of 1.483 million units. This was a 3.1% decrease compared to the same period last year. An estimated 1.471 million building permits were issued in 2024, a 2.6% decrease from 2023.

The number of single-family homes approved for construction but not yet started fell 2.1 per cent to 141,000. Completion of single-family homes fell 7.4 per cent to 948,000, the lowest level since March. The stock of single-family homes under construction rose 0.8 per cent to 641,000.

Residential investment has weighed on gross domestic product for two consecutive quarters, with the Atlanta Fed forecasting fourth-quarter GDP growth at an annualised rate of 3.0 per cent. The economy grew at an annualised rate of 3.1 per cent in the third quarter.

A separate report from the Federal Reserve showed that industrial production rose 0.6% month-on-month in December, with production of aerospace and miscellaneous transportation equipment rising 6.3%, which also boosted economic growth in the previous quarter.

Industrial production rebounded 0.4 per cent in November. Manufacturing, which accounts for 10.3 per cent of the economy, has largely stabilised in recent months after the Federal Reserve began cutting interest rates. However, Mr. Trump's proposed trade and immigration policies pose downside risks.

"The rate cut will support purchases of goods such as cars and heavy machinery," said Gus Faucher, chief economist at PNC Financial. "But higher prices due to tariffs could dampen demand. Many US producers use foreign inputs in their manufacturing processes."

Traders are expecting two rate cuts before the end of the year, and Federal Reserve Governor Paul Waller has hinted that more could follow if economic data weakens further.

Treasury yields edged higher on Friday amid volatile intraday trading after a flurry of positive data on housing and industrial production supported expectations that the Federal Reserve will slow the pace of rate cuts and may cut rates only once in 2025.

Investors were also generally hesitant to make big bets ahead of President-elect Donald Trump's inauguration on Monday, when bond markets were closed for Martin Luther King Jr. Day, amid uncertainty over tariffs, tax cuts and immigration policies.

Yields on U.S. two-year Treasury bonds, which track the Federal Reserve's interest rate expectations, rose 3.4 basis points to 4.272 percent on Friday after hitting a two-week low of 4.221 percent.

However, two-year Treasury yields fell 12.4 basis points last week, the biggest weekly decline since late November.

The yield on the 10-year note rose 0.1 basis point to 4.613 per cent on Friday, after falling to a two-week low. The yield slipped 16.1 basis points last week, its biggest weekly decline in seven weeks.

Will Compernolle, macro strategist at FHN Financial, said: "A lot of the sell-off is really just a recalibration of the past few days. The consumer price index (CPI) has significantly changed the narrative that inflation is hopeless."

Excluding volatile food and energy components, data on Wednesday showed that core CPI growth slowed in December to just 0.2 per cent after rising 0.3 per cent in November, following four consecutive months of 0.3 per cent gains.

Compernolle said: "The rise in yields on January 17 was not that dramatic. People are just waiting for all the executive actions next week."

The London Stock Exchange Group (LSEG) data revealed that U.S. interest rates rose following the release of economic datafuturesThe market believes that the 2025 rate cut has changed from about 43 basis points late Thursday to 39 basis points. The market also sees a 66% chance that the next rate cut will happen at the Federal Reserve's June meeting.

"We think yields should come down over time," said Bill Merz, head of capital markets research at U.S. Bank Asset Management. "Our inflation data is pretty seasonally adjusted, which is one of the reasons for the concern about what the Federal Reserve will do and how much they will cut interest rates this year."

But Merz said there was downward pressure on inflation and "it should show up in some form over the next few quarters", citing the deceleration in US housing inflation, which accounts for half of consumer prices, and the impact of the slowdown in Chinese exports to the US, which has been a consistent trend over the past two years.

Merz said U.S. Bank Asset Management expects the Federal Reserve to cut interest rates twice in 2025, in line with the Fed's own December forecast.

Markets are currently eagerly anticipating Trump's inauguration on January 20, and his wide-ranging trade tariffs are expected to further ignite inflation and spark a trade war, potentially increasing gold's safe-haven appeal.

The dollar has jumped in the past few weeks on the back of rising Treasury yields, reflecting expectations that Mr. Trump's policies could spur inflation at a time when the US economy is already strong. But Wednesday's softening core inflation data, coupled with Federal Reserve Governor Paul Waller's statement on Thursday that three or four rate cuts are still possible in 2025 if the data support it, gave bond markets a respite from the relentless sell-off.

This has led markets to increase their bets on the Federal Reserve's 2025 rate cut, putting some pressure on the dollar ahead of Trump's return to the White House this week.

The dollar index rose 0.34 per cent to 109.33 on Friday, away from a more than two-year high hit early last week. The dollar index fell about 0.22 per cent last week, breaking a six-week winning streak.