- Rallies in stocks and bonds point to receding fear of inflation or fiscal slippage.
- USD selloff suggests tariffs will prove to be benign.
- But America First policy could meet with global retaliation.
- US macro cycle is also not conducive for a bout of policy fog and possible overheating.
- We will watch for last week’s complacency to be reversed shortly.
Commentary: Impact of Trump’s first week
Trump 2.0 has started with a determined and organised set of actions. Through a flurry of executive orders over the last few days, President Trump took the US out of the Paris climate accord, the World Health Organisation, and a global agreement on corporate minimum income tax. Several steps against undocumented immigrants were rolled out, while the crypto space received a bunch of supportive measures. On trade, the US-Mexico-Canada agreement was put under review, along with trade dealings with China, Mexico, and Canada. The Tik Tok ban was paused for 75 days, a national energy crisis was declared that would allow for easing of exploration and drilling, and a wide range of steps were announced to reverse climate change related regulation. Additionally, many measures were announced to undo diversity, equity, and inclusion initiatives. Federal hiring and foreign aid were largely frozen. The president has also made strong push for taking over Greenland. A fill list of executive orders can be found here.
The week was characterised by a lot of talk about impending tariffs. Trump threatened 25% tariff on Canada and Mexico from February 1 over what he views as failure to stop drugs and migrants from coming into the US. There were also musings about a universal tariff of 10% on all imports and additional tariff on China.
It is tempting to see the developments of the first week of Trump’s presidency and take comfort from the fact that no actual tariff has been imposed. In fact, market pricing so far indicates fairly low probability that major tariffs would be unleashed soon. The dollar sold off during the week, stocks rose, and fixed income rates rallied. Fears of inflation that could come with Trump’s policies have taken a backseat for the time being. The market is keen to believe that tariff threats are nothing more than a bargaining ploy, scaling back of various Biden-era spending measures would bring fiscal policy under control, and immigration measures won’t go too far. Expectations are also for the crypto/tech complex to see a surge in investment, followed by productivity boost and value creation.
But these are extremely early days for such complacency. Trump’s mercurial policy-making comes with risks of creating a series of headwinds, including setback for green transition, regulatory capture by the tech oligarchy, and retaliatory measures by nations and blocs affected by the confrontational America First approach.
Given that Trump has talked about his belief in the potency of tariffs, actual and threatened, for four decades, we are sceptical that this four-year term would somehow begin and end with no application of his favourite tool. A week without tariff imposition should not be seen as a welcome marker for things to come.
More critically, the current macro juncture does not lend much room for policy volatility. Asset price valuations are at an all-time high, economic momentum has been strong for years, and the investment cycle has already been going through a purple patch. Trump’s actions to deregulate and cut taxes, and desire to tighten labour supply and lower borrowing costs, are a recipe for economic overheating, we fear.
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