sTrump 2.0 will be all the more potent in reshaping America’s economic destiny since the White House, the Senate and the House are all blood red. Tariffs/mass deportation can mean inflation shocks but deregulation, AI adoption and DOGE will have a disinflationary impact on the economy.
Trump will apply punitive tariffs on a selective basis on specific countries (notably China) but his economic team is too world class to allow policies that hit US economic growth. With core PCE at 2.8%, the Fed has no reason to tighten even though I doubt if we will see the 100 basis point rate cuts projected in the last FOMC dot plots. A 25-basis point rate cut at the December 18 FOMC is certain but the real juice will be in the conclave’s new dot plot projections.
Scott Bessant is a fiscal hawk as are many Republican Senators, so the $36 trillion national debt and 1.8 trillion budget deficit will encourage a pivot to fiscal discipline in an era of financial/energy deregulation and government payroll cutbacks.
At 22.4X FE, the SPX is a full four points above its 18.4X average over the past decade. However, Trump 2.0 has goosed bullish sentiment, as the performance of Mr. Market’s fav sectors and the Mag-7 since Election Day suggests. The Age of AI is in full swing and I expect software is now the moment hottie du jour sector. Clean energy is just about as popular in the Trumpworld as diversity and inclusion mandates. The insatiable appetite of AI data centers means nuclear remains the magic wand.
Deregulation and deal making is nirvana for both money center banks and Wall Street investment banks as the blowout performances of my favs Goldman Sachs, Morgan Stanley, Wells Fargo and Citigroup attests.
The bond market angst over Trump 2.0 inflation and Uncle Sam’s debt load has led to a rise in the 10-year US Treasury yield to 4.39% but there is now potential value in short duration segments of the corporate/high yield debt.
The political woes of France/Germany have amplified the fall in the Euro and the Dollar Index has once again risen to above 107 but this scale of King Dollar strength is unsustainable as an overvalued dollar is inconsistent with Trump’s desire to boost American exports.
I am a nervous bull on cable at 1.25 as the inflation/growth paradigm inhibits rapid rate cuts by the old lady while the ECB policy rate is headed to 2% by mid-2025. The Aussie dollar also seems dirt-cheap at 0.6375 but Canberra needs a Chinese stimulus and a sustained pop in iron ore/LNG prices to move the Aussie significantly higher, though it can strengthen against the Kiwi.
The wild card in Planet Forex is the inevitable Bank of Japan rate hike, which will trigger a stronger yen as Tokyo knows that this is a policy move that will please the Big Guy in Mar-a-Lago while China’s PBOC may well respond to a draconian tariff with a beggar-thy-neighbour yuan devaluation that will cause havoc across Asia.
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