Powell v Trump let the fun begin

The triumphant return of Mr Trump’s return to the White House saw US equity markets return to record highs last seen at the beginning of December. The S&P 500 was also helped by a generally supportive start to corporate earnings season. He announced his return with a myriad of executive orders, some reversing actions from the previous incumbent of the White House. His desire to increase oil production, drill baby drill, I believe, is the term he used is well documented. He went a step further yesterday when he called for OPEC to increase oil production as he demanded they lower the oil price. He, in turn, expects the Federal Reserve to lower interest rates. He can influence both but not demand either.

We will see what the Fed has made of Trump’s return next week, and it could make interesting headlines. As was the case last year when the market got its expectations for rates all wrong, it may be the case again this year. The market has gone from expecting four cuts this year just a few months ago to just one 25 basis point cut in 2025. We now have a president whose intended policies push a pro-growth agenda, fiscally expansionary tax cuts, tariffs, deregulation and deportation of undocumented migrant workers, all of which could well have the effect of pushing prices higher, risking the possibility of the Fed not cutting rates but actually raising them at some point in 2025. Trump knows this, hence the desire to lower the price of oil.

In his first term, he had no problem attempting to influence the Federal Reserve, and one can already hear him preparing to do the same again this year. Any suggestion by the Fed that they will raise rates or even just pause cutting them will risk Mr Trump’s ire. A hawkish Fed next week, and those toys may well find their way out of the pram. In theory, Mr Powell has one more year to go; it’s unlikely to be dull. Earning season hits full flow next week, with some big names, including the likes of Microsoft, announcing.

We know the UK economy continues to struggle, further evidence came in the form of a disappointing retail sales report at the end of last week, earlier today the latest Gfk Consumer Confidence Index in the United Kingdom dropped to its lowest level since November 2023. The Fed will be faced with some tricky decisions, but they can console themselves that the US economy continues to look resilient. The Bank of England will have different problems to face. Reeve’s recent budget announcements, will come into measure soon and risk pushing inflation higher again in the UK, against a backdrop of a weak economy. Pantheon Research UK inflation could rise to 3.5% year over year in the summer. Against a back drop of a weak economy, that makes not a pretty picture.