Trump euphoria
Since the election of U.S. President Donald Trump for a second term, investors have been busy deliberating what it means for the global economy and financial markets. So far markets have reacted very positively to President Trump’s decisive win against Kamala Haris, with Republicans gaining control of both houses. President Trump campaigned hard on policies aimed at boosting U.S. growth, including proposed tax cuts, illegal immigration, imposing tariffs and deregulation, which have fuelled the so-called “Trump trade” in recent weeks.
Further, recently published data in the U.S. also revealed consumer confidence increased in November to the highest level in more than a year with a gauge of present conditions increasing to an eight-month high, measure of expectations for the next six months edging to an almost three-year high and inflation expectations over the coming year dropping to the lowest level since March 2020. However, we suspect once the new President’s inauguration is over in January 2025, the “Trump trade” may fade as the reality of some of President Trump’s election policies sets in.
Unintended consequences
It’s important to note there remains a few question marks over just how President Trump’s key policies will play out in the real world. A strong U.S. economy relative to the rest of the world (which has its challenges including China and Europe), will drive the already elevated U.S. dollar higher.
Further, U.S. Treasury yields have been rising in anticipation of President Trump’s win since mid-September, as investors price in stronger U.S. domestic growth and higher inflation in the months ahead. Both higher Treasury yields (that is, cost of capital) and U.S. dollar is a tax on growth, especially for the rest of the world. Recent global data releases have broadly disappointed expectations, primarily due to weaker-than-anticipated survey data from Europe. This has raised questions about the
sustainability of a bullish outlook for global growth. Add to this Trump’s proposed tariffs, which could also cost the U.S. consumers (as higher costs on imports is passed onto consumers) and not just the countries subject to these tariffs.
Trump 2.0 – some sobering statistics
It is worth highlighting a few statistics which brings home the challenge ahead for the incoming Trump administration. Since President Trump was last in the Oval Office, the total U.S. government has significantly increased.
In fact, under President Joe Biden U.S debt has increased by US$8.3 trillion. Markets are already of the view the U.S. is on an unsustainable debt path. Hence President Trump must walk the tight rope of reining in spending whilst not stalling economic growth. U.S. Treasury is expected to refinance around US$10 trillion of debt between now and the end of 2025. With short-term rates still around 4.5%, the weighted fixed cost of that debt – which is currently around 2.6% – will increase dramatically in the coming years.
Further, as it stands right now, President Trump’s fiscal policies could in fact exacerbate the current U.S. debt problem. The non-partisan Committee for a Responsible Federal Budget (CRFB) provided a summary of the budgetary impact of Trump’s policy proposals. It showed the total impact from President Trump’s fiscal policies would be a net deficit of US$7.75 trillion (the central case).
It’s important to appreciate, whether we like it or not, U.S. fiscal and monetary policies are a key driver of global markets and economic growth, including asset prices in Australia. Understanding the direction of U.S Treasury yields, U.S. dollar (given it is the global reserve currency) and global liquidity goes a long way in making the right asset allocation calls in client portfolios, in our view.
