WHAT TO WATCH: Trump Cabinet, Rate Bias, Spending Plans in Focus
(Bloomberg) -- The initial market rout in response to Donald Trump’s U.S. election victory ebbed after his acceptance speech and as investors say his policies are unlikely to match his rhetoric.
- Here are the key things investors are now watching to see where markets will go next:
- WHO ARE TRUMP’S FIRST CABINET APPOINTMENTS?
- LGIM strategist Lars Kreckel says Trump’s decisions over coming days and weeks are likely to narrow down the many potential paths his policies could take and the investment firm will be keeping a close eye on his cabinet appointments
- Should Trump surround himself with acknowledged experts of mainstream views, it could reduce the probability of unorthodox and unpredictable policy choices going forward, Kreckel says
- SocGen analysts echo that view, saying Trump’s selection for key cabinet positions may be calming or could invoke more concern
- TD Securities analysts say the president-elect normally announces his policy area coordinators by Thanksgiving; these appointments could offer some hint at the direction the incoming administration is likely to take
- Key cabinet appointments will almost certainly be unofficially divulged, after the holiday on Nov. 24
- We may have to wait until closer to Trump’s inauguration speech before we get a clear sense of the priorities, AXA IM’s David Page says
- HOW SPLIT ARE THE REPUBLICANS?
- Given the Republican Party has control of both houses, there are expectations that Trump will have free reign when it comes to implementing his campaign agenda but others point out his party is deeply split
- Even though both houses are likely to be controlled by Republicans, this is no guarantee of agreement on his more outlandish policies, M&G’s Eric Lonergan says
- Even though he will be pushing on an open door in repealing Obama-care and cutting taxes, both are likely harder to implement in practice
- It’s not inconceivable that he alienates both Republicans and Democrats, resulting in even greater gridlock in Washington than in the past few years, LGIM’s Kreckel says
- WILL TRUMP HOLD GOOD ON HIS SPENDING PLANS?
- The president-elect mentioned U.S. infrastructure investment in his first speech, echoing earlier comments that he would boost construction of roads, airports and bridges
- At face value, the above policy agenda would boost economic activity over the next two years; however, Trump has pledged to increase trade protection and reduce immigration, policies that would simultaneously weaken economic growth and increase inflationary pressures, according to Standard Life political economist Stephanie Kelly
- It’s plausible that the new administration won’t ramp up tariffs on Mexican and Chinese imports, content instead to bury the prospect of new trade agreements and make more use of enforcement clauses in existing agreements, says Kelly
- The U.S. economic outlook may improve, at least initially, if Trump gets ahead with his fiscal spending plans and the U.S. economy is still in a fairly good shape, Credit Agricole analyst Valentin Marinov writes
- Stefan Kreuzkamp, CIO of Deutsche Asset Management, says Congress will probably make it hard for him to make good on his extravagant campaign promises
- But if enacted at anywhere near the scale indicated during the campaign, the effects would be higher economic growth in the short term, eventually leading to higher inflation and higher interest rates so the relative calm in USTs may prove short- lived
- WHAT ABOUT FOREIGN POLICY?
- During the campaign, Trump’s foreign policy sparked headlines as he promised to oppose the Trans-Pacific Partnership and pledged to brand China a currency manipulator and build a wall on the border with Mexico, while other comments undermined NATO
- But his first speech after winning had a more conciliatory tone, as he said “we will be willing to get along with all other nations willing to get along with us”
- Nonetheless, Deutsche Bank’s George Saravelos says it’s hard to avoid the conclusion that globalization has peaked and most likely embarked on a reversal
- Jefferies analyst David Kerstens says the risk of increased protectionism may derail a recovery in global trade
- Standard Life’s Kelly says if the new Trump administration pursues an aggressive unwinding of polices that have supported globalization, an extended period of weakness for risk assets is likely
- Protectionist policies could drive up import prices, anti- immigration policies could boost domestic wages and significant fiscal stimulus could add further to inflationary pressures, LGIM’s Kreckel says
- These are second-round effects though that could take time to materialize, he adds
- WILL HE REALLY PUSH FOR HIGHER RATES, REPLACE YELLEN AS FED CHAIR?
- “The interest rates are kept down by President Obama,” Trump said in an interview two months ago; “I believe it is a false market because money is essentially free”
- Rabobank analysts says Trump is expected to replace current Federal Reserve Chair Yellen when her term expires in February 2018, which could lead to the Fed changing its course
- Danske analysts say market will focus on whether Trump will be able to move Fed in a more hawkish direction by appointing “hawkish” governors
- And SEB analysts say looser fiscal policy could mean more rate hikes may be warranted in the out years compared to previous forecasts
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
People Donald Trump (Trump Hotels & Casino Resorts Inc)
Barack Obama (United States of America)
David Kerstens (Jefferies International Ltd)
David Page (AXA Investment Managers UK Ltd)
Eric Lonergan (Prudential PLC)
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