What effect will Donald Trump’s election have on the US and global economies?
A lot of Trump’s economic policy is similar to the current Conservative policy in the UK. He has been elected on a platform of lower taxes – in terms of both income tax and corporation tax – which is generally seen by markets as positive. This could lead to a large initial increase in the government deficit, as was the case with Reaganomics in the early 80s, and could push Treasury yields higher (prices lower) in the short term. However, Mr Trump’s position on trade and tariffs could hinder global trade, which will is generally seen as a negative by markets.
Will this result lead to a delay in US interest rate rises?
The immediate reaction in the markets has been to pull back from the probability of a rate hike. However, the US Federal Reserve (Fed) will make its decision based largely on economic fundamentals and labour market data. These remain strong and are unlikely to weaken before year-end. Unless equities fall sharply, we still expect a Fed rate rise in December.
How much control will Trump have over Congress to implement his policies?
Republican control of both houses of Congress gives the President-elect a potentially smoother ride than his predecessor. However, the system of checks and balances built into the US system – between the President, the legislature and the judiciary – will continue to act as a moderating factor. In addition, many of Mr Trump’s policies are at odds with the more traditionally conservative – free market, small government, low government spending – position of many in his party. This means he will need to compromise to get legislation through.
Trump has talked about the US getting a better deal with its trading partners, especially China and Mexico. Do you think he will follow through and how will this impact markets?
In the short term, the Mr Trump is likely to focus on the domestic economy. In the longer term, we can only wait and see what policies emerge from the campaign rhetoric. It’s worth noting that his victory speech struck a moderate and conciliatory note, suggesting a less bellicose approach in office than his campaign speeches implied. We are likely to hear regular aggressive noises about trade, though, and markets will probably respond badly.
Will Mr Trump’s stance on immigration affect the longer-term labour supply? Would a fall in labour supply have an impact on his plans for greater infrastructure spending?
Employment data for the US remains strong. By some measures, the US is pretty much at full employment, which suggests that any restrictions on the labour supply could lead to further wage inflation. This could potentially act as a brake on economic expansion. But the US still has high levels of underemployment – people not classified as unemployed who might enter the labour market if it was tight. And, as with many of Mr Trump’s stated goals, the devil here will be in the detail. Actual immigration reform would require changes to long-established legislation and might even attract constitutional challenges.
What’s our (Coutts & Co) view on currencies in light of Mr Trump’s victory?
Short-term volatility is likely as the markets come to terms with the surprise result, although markets have been calmer than we expected so far. The major initial beneficiaries were the yen, the Swiss franc and gold, traditional ‘flight to quality’ assets, and much of these gains were reversed in the hours since the result announcement. In the longer term, the impact on currencies depends on a combination of fundamentals, policies and valuations.
Source: Coutts & Co Investment Services Bulletin, November 8, 2016