Sharply rising bond rates could stem Wall Street's 'relief rally' and push interest rate cuts further into the future

The apparent roar of approval was almost deafening.

Wall Street pounced back into record territory with the Dow Jones Industrial Average up 3.6 per cent, one of the biggest single-day jumps in years.

And, unlike the past two years, the surge wasn't merely concentrated in a handful of giant technology companies promising riches from an artificial intelligence future.

Wednesday night's reaction was broad-based, including huge lifts in small companies.

For Trump supporters, it was a vindication of the soon-to-be-sworn-in new administration's economic credentials.

To a large extent, however, it was a relief rally.

Many investors had been expecting a tighter race with the possibility of a contested result, drawn out through the courts and, in a worst-case scenario, social upheaval and widespread violence.

Kamala Harris's early concession and her pleas to Democratic voters to accept the result changed all that.

The jubilation didn't transport Down Under.

Australian stocks went backwards as the longer-term implications of a second Trump administration began to sink in.

It's a world that, down the track, promises a return of inflation and permanently higher interest rates as America shifts to a more protectionist global stance that punishes China and, by extension, hurts Australia.

Something strange is happening on money markets

While investors focus on companies and stock markets, there is a far bigger and more influential market that dominates the global economy and determines our financial wellbeing.

That market, the market for money, has been flashing red now for about six weeks.

Since mid-September, US money markets almost inexplicably have begun forecasting a rise in interest rates.

This graph is the US government 10-year bond yield, or interest rate.

The bond is essentially the global benchmark for interest rates and is considered to be the "risk-free" rate of cash.

The sharp rise in yields in recent weeks is highly unusual because the US Federal Reserve has only just begun cutting official rates.

It kicked off the cutting cycle last month with a double cut, slashing the official rate by 0.5 percentage points, and is expected to follow up tonight with a 0.25 percentage point cut.

That would take the US official interest rate to 4.5 per cent.

Ordinarily, the market would be sending rates lower, trying to anticipate where the Fed may stop.

Instead, the sharp rise represents a fear that the rate-cutting cycle may be short-lived and that American rates will stay higher for longer.

If sustained for any length of time, the move on money markets could spell trouble for Wall Street and global stocks.

For much of this year, the New York Stock Exchange has been driven by two factors.

One has been the insatiable demand for anything to do with artificial intelligence, which has fired up a boom among the handful of big tech companies like Apple, Alphabet and Nvidia.

The other has been the long-awaited and extended program of interest rate cuts, which could now be under threat.

It is not just the prospect of tariffs, the tab for which would be picked up by consumers in the form of higher prices, thereby fuelling inflation.

Factor in the potential for deportation of workers, a key promise during the election campaign, which would push up the cost of labour.

Then add in the tax cuts, which would result in much higher deficits and the need for more government debt to fund the budget shortfall, and you have a recipe for a spike in interest rates.

How does this affect us?

A 10 per cent lift on tariffs for all goods entering America would dampen global growth, for which we'd feel some side effects.

But a 60 per cent hit to Chinese goods would certainly hurt us, given China is our biggest trading partner.

At a Senate estimates hearing, Reserve Bank of Australia governor Michele Bullock played a straight bat when asked about the potential impact of a Trump presidency on Australia's economic fortunes.

"It might be inflationary in some ways, but it might be deflationary in other ways," she said.

"If China ends up badly affected by this, that badly affects us. So, it's not easy to dissect what's going to happen with all of this."

Central bank chiefs have to be even more diplomatic than heads of state.

A minor slip of the tongue can send the currency crashing and money markets into a tizz.

Assistant governor Chris Kent, sitting alongside Bullock, was equally tactful but just as concerned.

The tariffs would strengthen the US dollar and, with less demand for foreign goods, dampen global demand, which was "a negative for growth elsewhere".

Then he dropped the clanger. America would likely have higher inflation and higher interest rates in the long term.

"And because the US is such an important source of funding, and the demand by the US government for borrowing is substantial, that'll have upward effects on global interest rates. It's also pushing the US dollar up and other currencies down."

If the RBA was cautious about the timing of Australian interest rate cuts on Tuesday, it's even more wary now.