Donald Trump’s victory was secured on an unequivocal promise to exhausted American families that he would “end inflation,” but markets and economists expect his second term to do the opposite.
A combination of corporate tax cuts, government borrowing, lower immigration, and swinging tariffs on foreign imports is expected to heat the US economy and raise prices.
Bond yields on 10-year US Treasury bonds, which effectively represent the US government’s borrowing rate, rose 3.6% overnight, and rose more than 15 basis points to above 4.4% as European markets opened.
This suggests that investors believe borrowing will rise, and the Fed will have to slow down interest rate cuts in order to address inflation.
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A clearer picture will emerge on Thursday when Federal Reserve Chairman Jay Powell makes an announcement Mr. Trump He said he would not be reappointed and announced the next step on interest rates.
Markets are still anticipating a 0.25 percentage point cut (a similar move to that expected from the Bank of England earlier in the day) but Powell’s comments will be scrutinized for signs of what Trump 2.0 means for the potential for further cuts.
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But higher prices for consumers are not necessarily bad news for US businesses, with the dollar rising against sterling and the euro as swing states decline for Trump, and futures trading on Wall Street pointing to a rise when they reopen with his confirmation as president-elect.
US banking stocks received support, with shares of JP Morgan, Goldman Sachs, and Morgan Stanley rising by more than 6% in pre-market trading, in addition to Tesla, which rose by more than 13%, as markets expect dividends to shareholders. Elon Musk Campaign path support.
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Defense inventories were also high, and not just in the US – BAE Systems and Rolls-Royce both rose – reflecting potential pressure on America’s NATO allies to meet their commitments to increase spending.
Bitcoin was also positive in anticipation of a more moderate regulatory environment from the president who used the campaign platform to launch his own cryptocurrency.
By contrast, renewable energy holdings, the target of much of Joe Biden’s economic stimulus, were in negative territory, with wind and solar priorities likely to be replaced by a pledge to… “Dig, baby, dig.”
Even more troubling for America’s trading partners and allies will be Trump’s promise to erect barriers to free trade.
The man who said tariffs “are the most beautiful word in the world” has pledged to impose a 60% tax on Chinese imports and 10% on imports from elsewhere, a highly protectionist move that could lead to a trade war with China and the European Union.
This will only increase prices in the United States, as importers pay duties at the point of entry, and other trading blocs are likely to respond in kind.
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The European Union has already imposed its own 35% tariff on Chinese electric vehicles, much to the dismay of the continent’s automakers that the measure is intended to protect.
While these tensions continue, post-Brexit Britain is likely to remain a spectator, a relatively minor player outside the major trading blocs.