EDGE AND ODDS’ Almost DaiLY Chat (a totally AI generated chat on the day’s post courtesy of Google’s NotebookLM): November 7, 2024
What Trump’s Win Means for the Economy President-elect plans tariffs and tax cuts, as in his first term. There are risks with both, but also lots of caveats.
(…) Trump’s main economic tools will be the same as in that first term: tariffs and tax cuts. But there’s a difference. The tariffs he’s planning will be broader and higher, and the tax cuts more narrowly targeted.
The consensus of economists and investors is that tariffs will put upward pressure on inflation while tax cuts could spur growth and add to deficits, together tending to nudge interest rates higher. And indeed, long-term Treasury bond yields had risen recently on strong economic data and Trump’s improved polling, and shot up early Wednesday, along with stock-index futures, as Trump’s victory became apparent.
(…) In his first term, 11 months elapsed between initiation of the case against China and imposition of tariffs. Tariffs may also be rolled into broader negotiations on extending the 2017 tax cut.
Trump’s first-term tariffs had no noticeable effect on inflation because they were relatively modest, and globally subdued demand and investment and slack labor markets were pushing in the opposite direction. On the eve of his election, wages were rising just 2.4% a year. Bond investors expected future inflation to average 1.8%, below the Fed’s 2% target.
This time Trump has proposed much higher tariffs—at least 60% on China, and 10% to 20% on everyone else. Such a combination would lift U.S. tariff rates to their highest since the 1930s. And it would come when demand is brisk, supply chains are vulnerable to geopolitical conflict, and memories of inflation are fresh. Wages are growing 3.8% a year, and bonds see future inflation at 2.3%.
This suggests tariffs could pose more of an inflation risk than in his first term. Morgan Stanley estimates Trump’s 60% and 10% plan would raise U.S. consumer prices 0.9%. That’s a one-off effect: Eventually, inflation should fall back to its underlying trend.
But other factors could result in a smaller impact. Importers could absorb more of the tariff into their margins. The dollar could rise, offsetting higher import prices. Most important, some advisers say Trump is using tariffs as a negotiating tactic to lower other countries’ trade barriers, so actual tariff increases will be less than he has threatened. And if Trump sees tariff fears hurting stocks or pushing up interest rates, he may compromise. (…)
Portions of the tax law that Trump and congressional Republicans passed in 2017, such as for lower rates for individuals and businesses who pay their taxes on their individual returns, expire at the end of 2025 and they have given priority to extending the law. That would cost about $5 trillion over 10 years, the Committee for a Responsible Federal Budget estimates. The process is likely to consume a lot of next year.
Full extension shouldn’t have much effect on growth or interest rates because that’s already built into the behavior of investors and the public.
Not so with Trump’s other proposals, which have at times included lower corporate tax rates; exempting tips, Social Security benefits and overtime pay from taxes; and deductions for car loan interest and state and local taxes. These proposals would, the CRFB estimates, add about $4 trillion to the deficit over 10 years.
Tariff revenue would reduce that cost somewhat as would spending cuts, though Trump also plans some spending increases. (…)
Deutsche Bank estimates that a unified Republican government would boost growth by 0.5 percentage point in 2025 and 0.4 in 2026 without higher tariffs. With a 60% tariff on China and 10% on everyone else, Deutsche estimates the net effect on growth becomes negative.
Tax cuts would also add to the deficit and put upward pressure on interest rates. John Barry, rates strategist at JP Morgan, estimates Treasury’s current schedule of debt auctions is enough to fund next year’s deficit, but would fall $3.3 trillion short from 2026 through 2029, without extension of the 2017 tax cut. The shortfall would be even larger if the tax cut is extended and Trump’s plans are enacted.
If the Treasury starts upping auction sizes to finance larger deficits, that is likely to put upward pressure on yields. Barry estimates a unified Republican government would raise 10-year yields by 0.4 percentage point, of which the market had already built in 0.15 point through Friday.
But with the last fiscal year’s budget deficit at $1.8 trillion, triple the level of eight years earlier, even a Republican Congress may not give Trump all he wants. (…)
- President-elect Trump has proposed a 10% across-the-board tariff on America’s trading partners with a 60% tariff levied on China. If implemented shortly after Inauguration Day on January 20, these tariffs would impart a modest stagflationary shock to the U.S. economy in 2025. Our model simulations show that the core CPI inflation rate next year would shoot up from its baseline value of 2.7% to 4.0%. Under this scenario, U.S. real GDP would rise by a sluggish 0.6% in 2025. (GS)
What’s at Stake With the Fed, Now That Trump Has Won? The president-elect has said he wants a say on interest rates, and his policies might alter the outlook for growth and inflation
(…) Trump has said he should be consulted on the Fed’s interest-rate decisions, and a group of his allies drafted proposals earlier this year that would require candidates for Fed chair to privately agree to consult informally with Trump on the central bank’s decisions, The Wall Street Journal reported.
But Trump has also told Bloomberg that while he wanted to weigh in on monetary policy, he didn’t necessarily want to order the Fed what to do. Some advisers have asserted the importance of the Fed’s independence. (…)
Trump’s most direct way of increasing his influence at the central bank would be to install loyalists on its seven-member board of governors, in particular the chair. Powell’s term as chair expires in May 2026. His separate term as governor expires in January 2028. Most legal experts say he can’t be removed before the end of his term without cause.
Trump has limited opportunities for replacing Fed policymakers. Only two of the current seven governors have a term that expires in the next four years: Adriana Kugler in 2026 and Powell in 2028. At one point in Trump’s first term, there were four vacancies.
Even then, the Senate must confirm a president’s nominees. Senate Republicans effectively blocked some of Trump’s intended candidates in 2019 and 2020, believing them susceptible to presidential cajoling.
Moreover, the Fed chair and six other governors hold only seven of 12 voting seats on the committee that sets interest rates. Presidents of five of the Fed’s 12 regional reserve banks fill the other slots on a rotating basis. Most are apolitical technocrats who prize the central bank’s institutional tradition of independence. (…)
What Donald Trump’s victory means for China
(…) While Trump is widely expected to ramp up tariffs in his second term, when and how this will be done are still up for discussion. We think that the 60% tariff call may be a starting point for negotiations rather than a set-in-stone number – you may recall that the first Trade War saw a truce after an agreement from China to increase imports of US agricultural goods.
There are two roads to narrowing the US-China trade deficit: either reducing China’s exports to the US or increasing China’s imports of US goods. Given the respective impacts on inflation and job creation, we would assume the latter would also be a welcome outcome for the Trump administration.
If we do take the 60% tariff threat at face value, despite various preparations being made for a potential Trump return, there is no denying that a 60% blanket tariff would have a significant impact on Chinese exports to the US.
It’s also worth noting that the US has also gradually become a less important export destination for China as well since the first trade war, with exports to the US falling from 18.2% to 14.3% of total exports in 2024 year-to-date.
A question to ask is will the US target Chinese companies’ overseas production? Is this feasible and if so it could lead to a game of cat and mouse and searches for loopholes?
China will undoubtedly retaliate if we do get aggressive tariffs from the US. Key import categories including agricultural products, minerals and chemicals, and machinery and mechanical appliances. If tariffs are significant, it could be a catalyst for higher inflation in China as well.
Could a Trump win have a stimulus impact? Over the last few months, a common argument has been that a Trump win and the perceived shock from additional tariffs would lead to a more aggressive stimulus response from China to offset the likely loss from exports.
This week’s National People’s Congress concludes on Friday, and the delayed timing from the originally expected late October meeting was very likely at least in part considering the new window gave policymakers a chance to address a possible Trump win.
In our view, the odds for a larger policy support package will rise somewhat with a Trump victory, though it may not necessarily be announced immediately. According to a recent Reuters report, the expected package size is RMB 10tn over 3-5 years, with RMB 6tn spent on addressing local government debt issues and RMB 4tn on supporting the property market.
Top officials have signalled multiple times this week that the PBOC is ready and able to ease policy further if necessary – we expect to see further rate and RRR cuts moving forward as well as expanded open market operations to help support financial stability whenever necessary.
Chinese exporters have become less reliant on the US in recent years
Financial flows: the initial Chinese equity market reaction to Trump’s victory showed modest capital outflow pressure.
- The larger decline seen in the Hang Seng Index versus onshore indices indicates that foreign investors tended to be more concerned than domestic investors on a Trump win’s impact on Chinese companies.
- Foreign holdings of Chinese domestic assets fell around 15% from the peak in 2021 to the start of 2024 before rebounding 12.6% since then, in large part thanks to a very strong close to the third quarter. Chinese assets have been underweight by many global investors, and a Trump victory could be a catalyst for some further pullback and a continuation of the “de-risking” trend, especially if we see measures to discourage or ban US investment into Chinese firms. However, we are of the opinion that China’s domestic catalysts, including the upcoming scale and efficacy of stimulus policies, should play a bigger role relative to the US election outcome.
Non-financial flows: Net foreign direct investment into China has cratered to historical lows this year, and new US investment into China has been muted for the last several years already. A Trump win sparking further US-China tension certainly will not help matters on this front. Asymmetric tariffs could accelerate China’s outward direct investment.
Since the first trade war in 2017, the US trade deficits with China have narrowed but widened versus other Asian economies. This increases the odds that China may not be the lone target of Trump’s next possible trade war. However, taking into consideration other geopolitical considerations, tariffs imposed on other Asian economies are expected to be lower than what is ultimately levied on China. If this is the case, we could see an acceleration of outward direct investment from China to at least partially mitigate some of the impact of tariffs.
Xi Congratulates Trump on Victory, Urges Stable US-China Ties Two sides should ‘find a way to get along,’ Xi Jinping says
The Chinese leader sent a congratulatory message to the president-elect and expressed his desire to keep relations “healthy and sustainable,” state broadcaster China Central Television reported Thursday. (…)
China and the US should “find a way to get along correctly in the new era, which will benefit both countries and the world,” Xi added. The Chinese leader sometimes refers to a fresh era for China that creates an opening for his nation to become more influential globally while the US declines. (…)
China Sets Yuan Fix at Weakest Since 2023 Amid US Tariff Risk
China slashed the daily reference rate for its currency to a level unseen since late 2023, a sign the central bank is allowing depreciation under the threat of trade tensions with the US under a Donald Trump presidency. (…)
The effect of a depreciating currency on China’s economic growth may be smaller this time compared with the the trade-war during the last Trump presidency, due to China’s smaller trade exposure with the US, Xing wrote. In 2018/19, the yuan depreciated by 11.5% versus the greenback and offset about two thirds of the tariff hike, according to the banks analysis.
Meanwhile, bearish views on the currency are still growing. UBS AG sees the yuan trading toward 7.4 per dollar amid trade tensions, while BNP Paribas SA expects it to reach 7.5 in 2025 under a 60% tariff scenario and likely China retaliation.
“They will devalue the currency in reaction to any tariffs from Trump with the magnitude of devaluation matching their perception of the economic impact to them,” Brad Bechtel, global head of FX at Jefferies LLC. wrote in a note to clients. “They almost have no choice.”
Vietnam set its reference rate for the dong at a record low, setting the stage for more weakness in the Southeast Asian nation’s currency as the dollar’s surge pummels emerging markets. (…)
Asian central banks are adapting to a strong dollar world after Donald Trump’s election win this week fueled a rally in the greenback, with the South Korean won tumbling to a two-year low. China on Thursday slashed the daily reference rate for its currency to a level unseen since late 2023, a sign the central bank is also allowing depreciation. (…)
China Export Growth Jumps to Two-Year High as Tariff Risks Loom Growth driven in part by firms front-running potential tariffs
Exports rose 12.7% from a year earlier to $309 billion, the customs administration said Thursday, significantly exceeding any economist’s forecast. The trade surplus in the month climbed to the third-highest on record, as factories ramped up shipments ahead of Christmas holidays and likely in anticipation of worsening trade tensions. (…)
October has historically been a weaker month for exports before a final rush in the last two months of the year. The rise was off a weak base in the same period a year earlier, when shipments abroad dropped almost 7%. (…)
Exports to the US rose 8.1%, the most in three months. Shipments to most markets climbed, with double-digit increases to Asean, the European Union, South Africa and Brazil. Shipments to Russia jumped almost 27%, the fastest growth this year. (…)
China’s steel exports jumped almost a million tons in October from September, with the 11.2 million tons of metal shipped in October, the second-highest on record. In reaction to that rising tide of exports, the world’s largest steelmaker outside China called for stronger trade measures. (…)
Highlighting a weakness in consumption, imports fell 2.3% to $213 billion last month. (…)
Last year, Chinese companies shipped $500 billion in goods to America, accounting for 15% of the value of all its exports. (…)
- After Trump’s Victory, One Company Prepares to Shift Production From China Most of Breville’s products are manufactured around Shenzhen
When the leader of global appliance maker Breville spoke to shareholders at its annual meeting on Thursday, he moved quickly to address the elephant in the room.
“Now that [Donald] Trump has won the U.S. Presidential election, the near-term risk of material tariff increases on consumer goods coming out of China has solidified,” Chief Executive Jim Clayton said. (…)
For Breville, the threat of new tariffs is a problem. The Australian company sells appliances such as espresso machines, toasters, juicers and microwaves in more than 70 countries, including the U.S. Most of its products are manufactured in the area around Shenzhen, a sprawling Chinese city on the border with Hong Kong. (…)
Clayton said the company is already responding to Trump’s election, including by moving more of its production out of China as quickly as possible to protect itself against any new U.S. tariffs. “We will continue our inventory build in the U.S., unabated, likely until the increased tariffs are enforced,” he added. (…)
Pragmatic business people are already preparing for increased tariffs. First, easy decision is to boost inventories. More examples from The Economic Times:
- Hong Kong-based M.A.D. Furniture Design will ramp up by 50% shipments of its Chinese-made, modern-style chairs, tables and lighting to its Minneapolis warehouse “to buy ourselves some time to react after the election,” co-founder Matt Cole said.
- In Chicago, Joe & Bella co-founder Jimmy Zollo already has quadrupled orders for the online retailer’s best-selling Chinese-made shirts and doubled orders for its most popular pants for adults who have trouble dressing themselves due to arthritis, dementia or being in a wheelchair.
Wall Street Salivates Over a New Trump Boom Wednesday’s epic, postelection rally augurs big, lucrative opportunities, investors and analysts say
(…) The enthusiasm is especially heated in a few areas, investors and bankers said. Banks and other financial companies climbed, with the KBW Bank Index rising 11%. Investors expect regulatory scrutiny will ease in a Trump administration.
Some also expect more dealmaking, potentially among smaller and midsize banks. The expected departure of Lina Khan, who leads the Federal Trade Commission and has been a thorn in the side of executives hoping to work out tech acquisitions, was cheered by investors and bankers.
“A lot of these mergers have been thwarted by the current administration,” the activist investor Carl Icahn said in an interview late Tuesday. Given a Trump victory, he said, “That’s going to change.”
The rally in shares of smaller companies caught many portfolio managers’ attention, with the Russell 2000 index of small companies rising 5.8%. Investors said a shift from accelerating globalization, which helped multinational companies, toward a focus on aiding domestic manufacturers and other companies will be beneficial.
“There is an expectation of economic policy pivoting inwardly for domestic growth, thus benefiting small-caps through broader growth,” said Michael O’Rourke, chief market strategist at JonesTrading.
There is no guarantee that Wall Street’s dreams will be fulfilled, of course. The expected Trump policies bring twin threats of higher inflation and larger budget deficits, economists have warned, potentially discouraging the Federal Reserve from cutting interest rates as aggressively as some had hoped.
Key members of the incoming administration, including Vice President-elect JD Vance, have advocated for greater scrutiny of mergers. Many are also outspoken in favor of tariffs, government intervention in the economy and a weaker dollar—positions that put them at odds with many in finance. (…)
The Trump administration is likely to soften capital rules proposed for the biggest banks, said bankers and people close to his campaign, while rising interest rates should aid bank profitability throughout the industry. Investors are hopeful that a more positive economic environment will ease pressure on regional banks and other smaller lenders, which have suffered in part in the midst of the worst commercial real-estate bust in years. (…)
“Relative to the last Trump term, it’s looking like he doesn’t have to worry about some congressional check on his actions, and of course he’s not running for re-election,” Kelly said. “That gives him a great deal of scope to pick and choose which policies he wants.”
- If the Trump proposal to reduce the statutory domestic corporate tax rate from 21% to 15% were enacted, it would boost our EPS estimate by approximately 4%. (GS)
- Likewise, during the trade conflict experience in 2018-2019, domestic-facing and defensive industries generally outperformed cyclical industries with elevated international business exposure. (GS)
The most powerful (unelected) man ever
Elon Musk — the most influential backer of President-elect Trump, thanks to his money, time and X factor — now sits at the pinnacle of power in business, government influence and global information (and misinformation) flow. Trump has the White House and four short years. Musk has so much more since his influence cuts across government, media, business, the world, space and time. (…)
It’s unmatched. As this election showed, politics and influence flow downstream from information control.
Musk, once seen by many as a fool for buying Twitter, now controls the most powerful information platform for America’s ruling party. X makes Fox News seem like a quaint little pamphlet in size, scope and right-wing tilt.Virtually every powerful voice in the Trump media ecosystem congregates on X — where their reality, whether tethered to facts or fiction, are set. X will be the prosecutor, defender, jury and judge of Trump governance. “You are the media now,” he proclaimed on X.
Musk transcends X, with close friends running the most-listened-to podcasts and every mainstream media platform eager for his appearance. He’s the rare figure with global swat.
Imagine you wanted to help mold America. You would instantly realize you need information dominance and vast political influence.
- With X and now Trump, Musk has both.
- The guy did a Mar-a-Lago sleepover on election night after throwing himself into the election — donating at least $119 million to Musk’s America PAC to help Trump, pushing JD Vance for the presidential ticket, then helping get Trump and Vance onto Joe Rogan’s top-rated podcast. (…)
Musk is helping staff the top ranks of the incoming White House and will run an unregulated entity to recommend ways to cut and reorganize government. Name another American figure with this kind of political juice. (…)
This creates conflicts of interest at an epic scale. But it’s hard to see the Trump White House caring, or Musk letting it slow him down. And, when you control a big chunk of the information flow, you get to shape how lots of people view it, anyway.
Importantly, there is now a very tech savvy influencer at the White House. Musk will be a powerful leader pushing the U.S. administration to quickly accelerate technology innovation and implementation, likely boosting economic growth and productivity, but also potentially counterbalancing President Xi’s policies that are making America lagging behind China in many key technologies.
From Richard Bernstein Advisors:
We previously highlighted (see “Fade the Election” and “Fade the Election – Part 2: Debt & Deficits“), what is anticipated at this stage of the election cycle often doesn’t come to fruition, so one should take these ideas with proper skepticism.
Importantly, these comments do not suggest we think any policies are particularly good or bad. We are simply dispassionately offering some thoughts that seem unlikely to appear in the broader discussion.
- Deglobalization remains our primary secular investment theme. Adding to a decade of outperformance, US small/mid-cap Industrials could be major beneficiaries of the new administration.
- Tariffs and movement to less efficient production suggest investors should position for higher secular inflation. Accordingly, bond market volatility is unlikely to subside. Truly tactical fixed-income investing could gain in importance.
- The debt and deficit issues will likely remain. There seems to be little enthusiasm regarding raising taxes and cutting spending, so US Treasury spreads versus AAA sovereign bonds will likely persist and could widen.
- Fiscal largess should normally be met with tighter monetary policy, but that hasn’t been the Fed’s plan over the past several years and seems unlikely to be so going forward.
- The US dollar could be in a strange limbo. A stronger USD might be needed to finance further deficit spending, but a strong dollar could hurt exports. However, a lack of fiscal and monetary discipline could weaken the dollar, which might help exports but hinder financing.
- The risk to European stocks could increase as solutions to the Ukraine/Russia war might exclude NATO.
- The risk to Taiwan is probably somewhat overstated, but the risks to various other Asian nations bordering the South China sea could be greater than is currently anticipated. EM investing could present country- or region-specific risks and opportunities.
- Energy seems attractive with respect to inflation, but Energy was the worst performing sector during the 2016-2020 period. The US remains highly dependent on foreign oil because the US doesn’t have refineries that can process shale oil. Virtually all shale oil is for export and not for domestic use.
- States rights could alter a broader set of laws. That could spur population relocation to more socially progressive or conservative states, and might impact the housing, real estate, and municipal bond markets.
- Cryptocurrencies remain highly speculative and a significant source of illegal monetary transactions. Government enthusiasm, however, could keep this game alive and, oddly enough, undermine the USD.
Then and now (David Rosenberg)
(…) The forward P/E multiple was 17 times in November, 2016, versus 22 times currently. Every valuation metric from price-to-earnings, price-to-sales, price-to-book, the Buffett Indicator (market cap-to-GDP) and the CAPE multiple are completely off the charts today – which was not the case the first time Donald Trump won. And that’s not even taking into account an S&P 500 dividend yield over 2 per cent then and barely over 1 per cent today.
High-yield bond spreads were 500 basis points then and are 280 basis points now. Investment grade spreads were 140 basis points versus 85 basis points today. Like equities, a whole lot of good news and then some is embedded in the credit markets at current levels. Not the case back in 2016.
For bonds, the starting point for the 10-year T-note yield in November, 2016, was 1.8 per cent. One could have easily argued for a cyclical bear market in Treasuries at that yield level – but today’s 4.5 per cent yield offers coupon protection that did not exist eight years ago.
The stock market already had a tailwind in November, 2016, with or without the GOP sweep, as there was no competition from a 0-per-cent real risk-free rate (using the yield of the 10-year Treasury minus the impact of inflation). Today, that inflation-adjusted rate is north of 2 per cent. Big difference.
The Fed Funds rate was near the zero mark at 0.5 per cent back then – and it had only one way to go (to 2.5 per cent at the December, 2018, peak). At 5 per cent today, and coming off the cycle peak, there’s only one way to go on this score – lower. The only question is the magnitude.
With respect to the economy, 2016 was more mid-cycle in nature with an unemployment rate near 5 per cent versus the current late-cycle 4 per cent jobless rate. That is a huge difference. What it means for Donald Trump’s policy plank is that there are more acute capacity constraints today compared with the 2016 election win.
The deficit-to-GDP ratio of 3 per cent and federal debt-to-GDP ratio of 95 per cent were far less of a fiscal constraint on Mr. Trump’s fiscal ambitions then compared with today, where the deficit tops 6 per cent of GDP and the debt ratio is fast approaching 130 per cent. This is a fiscal straitjacket that the market bulls, yet again salivating over prospective tax relief, may not be factoring in.
And there is an added constraint on fiscal finances – back in 2016, debt-servicing costs were absorbing just over 10 per cent of the revenue pie. That interest expense ratio is double that today and even before Mr, Trump’s tax measures, that ratio is set to spiral to over 30 per cent within two or three years. This structural debt and deficit dilemma is not on anyone’s mind right now. But once the debt service ratio tops 30 per cent, what follows are failed Treasury auctions, a destabilizing decline in the dollar, and credit rating downgrades that will pose a threat to America’s reserve currency status.
Ask anyone who was in Canada back in the early 1990s as to what life is like once the government fails to prevent the debt service ratio from piercing the 30-per-cent threshold. Not a pretty picture. And something that the credit default swap market, unbeknownst to the equity market bulls, is beginning to sniff out.
Also:
(..) a further sharp increase in 10-year Treasury yields would likely limit the magnitude of any potential rally in stock prices. In mid-September, Treasury yields reached a YTD low of 3.62% before climbing by 80 bp to the current level of 4.42%. All-else equal, a backup in rates of that size would typically be accompanied by a decline in equity prices.
Historically, the speed limit for stocks has been a 2 standard deviation increase in 10-year yields, a pace that currently equates to about 60 bp in a month. Instead, the S&P 500 index rose by nearly 3% concurrent with the jump in bond yields.
Equities have digested this move because it has been primarily driven by better economic data. Our US Economics team forecasts the Fed will cut the funds rate by 25 bp (to 4.5%-4.75%) on Thursday and reduce the policy rate by another quarter-point at the December 18th meeting. (GS)