Trump two, equity and bond markets had opposing views

We now know, and by a resounding victory, that Mr Trump will be the next President of the United States, again defying the odds early on and the pollsters of the day. I was grateful for the opportunity to be interviewed on Sky TV to get my thoughts on the potential economic impact a Trump Presidency will have on their domestic and global economy. The stock market in the US, as has been well documented, cheered basically on what they saw as the dawn of a new era for corporations, with lower corporate taxes and less regulation. Other developed markets not so much as they fretted on what the implications of a tariff threatening President might do for their domestic economies. The US treasury market fretted that President Trump’s policies would reignite inflationary trends. With the Republicans likely holders of power in the House and the Senate, President Trump could have relatively free reign to implement policies he sees fit.

What was my conclusion to SKY TV? Will he introduce 60% tariffs on imported Chinese goods or 20% on European goods? I doubt it. Will he introduce some tariffs so other governments take him seriously on imported EV cars, for example, very possibly? Ultimately, a trade war does no good; a modest levelling of the playing field somewhat is probably how he sees it, and as a deal maker, he will make deals. Having been partly voted in as he promises to cut inflation, risking the opposite seems unlikely.

For those who read my blog on Wednesday and saw my deliberate mistake, and thank you to those who pointed it out, I wrote hike, not cut when I referred to what the central banks of the UK and the US would do yesterday—agreed a fundamental error. In the end, they both cut by 25 basis points, as was expected, and as is always the case, the accompanying statements from the respective governors are of most interest, as they can give a clue of the path forward.

Andrew Bailey played a fairly straight bat when asked about the potential implications of the recent budget for inflation and interest rates. He was cautious when predicting interest rate cuts in the coming months, saying it was important not to do too much too quickly. The BoE has forecast that Rachel Reeves’s first budget as chancellor will increase inflation by up to half a percentage point over the next two years. The recent monthly composite  PMI came in below expectations. Rising prices and slower growth are a central banker’s nightmare.

The Federal Reserve also almost unanimously voted for a 25 basis point cut, and maybe slightly surprisingly, the expected course of rates over the next year barely moved at all. Treasury and gilt yields fell as prices rose post the respective meetings, reversing some recent losses.