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12 Nov 2024 | 3 minutes to read
At the time of writing, Donald Trump’s resounding victory might yet deliver the ultimate prize: the trifecta of the presidency and full control of both chambers of Congress - the House of Representatives and the Senate. He may therefore wield considerable power with global consequences for trade, interest rates and inflation.
Although the gap between rhetoric and deed will be unpredictable, Trump 2.0 will likely be unfettered second time around. In 2016, Trump was still “draining the swamp” with the aim of diminishing the influence of disparate groups within the Republican Party, but now has near complete control of the GOP; the Supreme Court has effectively granted criminal immunity to him while in office; and congressional checks may be weak given the election result.
Markets were quick to react to the news of a potential Republican clean sweep. US equities rallied strongly, with the Dow Jones, S&P 500 and Nasdaq hitting new record highs. Looking at the best-performing sectors, financials and energy stocks posted particularly strong gains. Trump has made clear his desire to deliver deregulation and tax cuts, which could be especially favorable for financials, while he has also stated his intention to ramp-up oil and gas production.
Additionally, the US dollar strengthened by around 1% on Wednesday, as the greenback extended its recent rally, while bond yields also rose following the election result, with the 10-year US Government Treasury yield up more than 15 basis points at 4.43%. This perhaps reflects investors’ expectations of increased government borrowing and spending and the potential for inflationary pressures to re-emerge as a result.
Away from conventional asset classes, cryptocurrencies also rallied last week, with Bitcoin hitting a record high above $80,000. Crypto investors are betting on Trump delivering deregulation.
Fiscal policy will be key. In 2018, Trump introduced the Tax Cuts and Jobs Act (TCJA). Some of these measures, including income tax cuts, are due to expire in 2025, resulting in an increase to personal taxation. It is therefore highly likely that Trump will seek to make the TCJA’s provisions permanent. Doing so, and funding other mooted tax cuts will require notable additional borrowing and could increase the national debt.
Additionally, the US will hit its ‘debt ceiling’ by year end. Democrats will likely be reluctant to precipitate an economic downturn and will be under pressure to negotiate a spending bill with Republicans. The extent of Republicans’ control of Congress will be key.
Trade tariffs will again be a signature policy of Trump’s presidency – whether a flat universal 10% on all imports or up to 60% on Chinese goods. For Trump, tariffs provide a possible source to help fund the spending measures he’d like to pursue. However, they could also have a negative impact on import-intensive US firms. High and widespread tariffs will likely boost inflation and be a headwind to overseas growth, particularly in China and Europe.
The Republican administration is also expected to take a tougher approach on immigration. Trump has suggested he would restore his ‘remain in Mexico’ program and conduct large scale deportations, though this may face legal and logistical obstacles. This may become a headwind for labour supply, in turn stoking wage inflation.
Trump is also expected to deregulate industries, perhaps most significantly impacting financial services and energy. While the profitability impact on financial services is likely to be favorable, this may be less clear cut for energy.
Of the four key policy areas considered here, three are likely to be inflationary, as reflected by the aforementioned bond and currency market moves last week. These moves anticipate higher borrowing, as well as higher near-term growth in the US compared to the rest of the world.
Finaly, Trump might test the US Federal Reserve’s (Fed) independence if he thinks their rate-setting policy restrains his pro-growth, America-first mandate. Last week its chair Jerome Powell dismissed the idea that Trump could legally fire him. The US Fed cut interest rates by 0.25% (to 4.5%-4.75%) 48 hours after the election result. Trump and the Fed could be on collision course.
The Bank of England (BoE) cut interest rates last week by a further 25bp, to 4.75% from 5%. Governor Andrew Bailey signaled at the beginning of October that the BoE could be ‘more aggressive’ at cutting borrowing costs should price rises remain under control. Following the Autumn Budget and the announcement of fiscal measures which may turn out in time to be inflationary, the Bank outlined a more cautious view. Following the rate setting Monetary Policy Committee’s (MPC) meeting, it was stated that a ‘gradual approach to cutting rates’ would be necessary to assess the impact of the National Insurance rise and other planned changes to taxation and public spending. On the back of this, futures markets have reduced the expected number of UK interest rate cuts going forward - now forecasting the next cut to be in March 2025.
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