(The opinions expressed here are those of the author, a

columnist for Reuters.)

By Jamie McGeever

ORLANDO, Florida, Jan 7 (Reuters) - U.S. financial

markets last year were more sensitive to economic surprises than

usual, and as Donald Trump prepares to begin his second term as

U.S. president investors should buckle up for more of the same

in 2025.

Especially in Treasuries.

The 10-year yield's sensitivity to inflation and activity

data surprises last year was the highest in more than 20 years,

according to Goldman Sachs. Although inflation has fallen,

growth fears have ebbed, and the Federal Reserve has started

cutting interest rates, these sensitivities persist.

Again, especially in Treasuries.

While equities' sensitivity to inflation surprises has

fallen as price pressures have cooled, it remains high by

historical standards. And stocks' sensitivity to growth

surprises, though still modest, has begun to tick up to near

pandemic-era levels.

What does this mean for the coming year? While benchmark

gauges of implied equity and bond volatility are muted, markets

are in a more tenuous position than they were a year ago. By

many measures, such as pricing, sentiment and valuations, they

are extremely stretched.

U.S. stocks have never been riding higher or represented a

bigger share of the global market cap, and the Fed's 100 basis

points of interest rate cuts since September have been met with

a counterintuitive 100-basis-point rise in the 10-year Treasury

yield.

Does this mean America's key markets are primed for

correction? Maybe. But what's easier to say with confidence is

that we're going to see wider intra-day trading ranges and

short-term reversals as investors contend with the biggest wild

card of all: Trump's agenda.

'VOLATILITY MAN'

History shows there is a "solid" relationship between macro

and market volatility, as Citi's Stuart Kaiser points out. And

with the world still in the dark as to how Trump's trade and

tariff policies will pan out and how the Fed will respond, macro

uncertainty is alive and well.

Indeed, the two biggest "tail risks" for world markets cited

in Bank of America's latest fund manager survey were "global

trade war triggers recession" and "inflation causes Fed to

hike." Both captured 37% of respondents' votes, significantly

more than the 10% garnered by "geopolitical conflict," the third

most-cited risk.

"With numerous large policy shifts on the horizon, markets

should be prepared for a lot more volatility ahead," Deutsche

Bank's George Saravelos said on Monday.

It is true that the initial year of Trump's first term,

2017, turned out to be a good one for Wall Street, as the S&P

500 index rose 19%, despite Trump's unpredictable actions. But

that was a period of low inflation, low interest rates, and

solid growth. Such low macro volatility is unlikely to be

replicated this time. And given the stretched nature of today's

markets, even modest economic surprises could spark big moves.

Just look at the sharp swings in U.S. stocks and the dollar

on Monday in response to a media report - later dismissed by

Trump - implying that his proposed tariff regime would be less

severe than feared.

But even if macro "vol" does increase, will it be enough to

puncture the generally bullish 2025 market consensus? Perhaps

not, suggests Phil Suttle, a Washington-based economist.

"(Markets) will be quite volatile but without much significant

net direction, as the perceived odds of these different (tariff)

scenarios oscillate," Suttle wrote on Monday in a note titled

"Volatility Man."

It is also possible that investors will increasingly ignore

Trump's social media posts on markets, economic policy or the

Fed, as they eventually did in his first term, especially if

real-world economic indicators remain stable. But it's far too

early for that right now.

Given the combination of stretched markets and an

unpredictable commander in chief, markets will feature a lot of

sound and fury in 2025. It could be a bumpy ride.

(The opinions expressed here are those of the author, a

columnist for Reuters.)