Evelyn Reynolds

Donald Trump’s election victory marks a historic return to the White House – an extraordinary political comeback that is likely to have seismic ramifications for the global economy.
The former president’s litany of campaign pledges include steep tariffs, tax cuts, deregulation and a push to withdraw from key global agreements.
Oxford Economics’s Ben May said the direct impact of Trump 2.0 on global growth could be limited in the near term, “but masks major implications for trade and the composition of growth, and for financial markets.”

A worker is making textile export orders at a production workshop of a textile enterprise in Binzhou, China, on July 8, 2024.
Nurphoto | Nurphoto | Getty Images

Donald Trump’s election victory over Vice President Kamala Harris marks a historic return to the White House — an extraordinary political comeback that is likely to have seismic ramifications for the global economy.
Speaking to his supporters in Florida early Wednesday, Trump said an “unprecedented and powerful mandate” would usher in “the golden age of America.”

The former president’s litany of campaign pledges include steep tariffs, tax cuts, deregulation and a push to withdraw from key global agreements.
Analysts say it is hard to pin down the extent to which Trump will seek to implement these measures in his second four-year term, but the consequences of any will have clear repercussions across the globe.
Lizzy Galbraith, political economist at asset manager Abrdn, said it remains to be seen exactly what style of presidency investors can expect when Trump returns to the White House.
“Congress has a really big part to play in this,” Galbraith told CNBC’s “Squawk Box Europe” on Thursday.

“If Trump does have unified control of Congress, as is looking very likely and is what we expect to happen over the next few weeks and days, then he does have greater latitude to implement his tax-cutting agenda, his deregulatory agenda, for example, but we are also likely to see elements of his trade policy sitting alongside that.”

On tariffs, Galbraith said there were currently two schools of thought. Either Trump seeks to use them as a bargaining tool to gain concessions from other parties — or he delivers on his promise and implements them much more broadly.

Trump’s favorite word

Trump has previously described “tariff” as his favorite word, calling it “the most beautiful word in the dictionary.”
In an effort to raise revenues, Trump has suggested he could impose a blanket 20% tariff on all goods imported into the U.S., with a tariff of up to 60% for Chinese products and one as high as 2,000% on vehicles built in Mexico.
For the European Union, meanwhile, Trump has said the 27-nation bloc will pay a “big price” for not buying enough American exports.

Former US President Donald Trump arrives during a “Get Out The Vote” rally in Greensboro, North Carolina, US, on Saturday, March 2, 2024.
Bloomberg | Bloomberg | Getty Images

“Now, I think it is worth pointing out that we do think that in any situation which Trump is using tariffs quite often, his principal focus is going to be on China. And we don’t see Trump’s secondary tariff pledge — that baseline tariff, which would hurt European companies — as being all that feasible,” Galbraith said.
“So, it’s not necessarily our base case that you see something like a baseline tariff applied that would really hurt European goods although there is still a distinct possibility there that specific European products could be affected,” she added.
Analysts have warned that Trump’s plan to impose universal tariffs are highly likely to raise prices for consumers and slow spending.

Europe

Ben May, director of global macro research at Oxford Economics, said the direct impact of Trump 2.0 on economic growth is likely to be limited in the near term, “but masks major implications for trade and the composition of growth, and for financial markets.”
For instance, May said that in a scenario in which the more radical aspects of Trump’s policy agenda are adopted, particularly on tariffs, the impact across the globe will be “very sizable.”
“A key unknown is whether a clean sweep raises the risk that a Trump administration will push through more extreme policy measures, such as larger, less-targeted tariffs,” May said in a research note.
“Uncertainty over Trump’s stance on the conflicts in Ukraine and the Middle East also adds to the risk of greater instability in both regions, which could take a toll on regional, and even global, growth,” he added.

The prospect of a second Trump presidency had long been viewed as negative for Europe and the European Union more broadly.
Yet, analysts at Signum Global Advisors said in a research note on Wednesday that “the magnitude of that truth remains underappreciated.”
Indeed, they argued that several factors mean the EU is likely to be “the biggest loser of a second Trump era,” citing trade tensions, an ongoing frustration with key European policy decisions and Trump’s likely desire to double down on America’s advantage at attracting capital relocation.

Asia

Analysts at Macquarie Group said Thursday that, at face value, Trump’s election victory is “bad news for Asia,” particularly China, but the region is “more prepared” than in 2016, when he first moved into the White House.

A cargo ship is sailing towards the docking of a foreign trade container terminal in Qingdao Port, Shandong province, in Qingdao, China, on June 7, 2024.
Costfoto | Nurphoto | Getty Images

“A key tenet of Trump’s campaign was higher tariffs. While well telegraphed, the headwinds that are likely to sweep across Asia, particularly China, should spike volatility and compress multiples as uncertainty prevails,” analyst at Macquarie Group said in a research note.
“A counter-balance to this is a likely acceleration in China stimulus measures,” they added. “The Chinese government has already outlined its ambitions to support economic growth at the 5% level and address property market woes to support domestic consumer confidence.”
Mitchell Reiss, an American diplomat and distinguished fellow at the Royal United Services Institute (RUSI) think tank, said there are likely to be some differences to the Trump playbook this time round.

“I think that President-elect Trump has said that he would like to increase tariffs on China again until the playing field is level, in his view,” Reiss told CNBC’s “Squawk Box Europe” on Thursday.
“What was interesting the last time when Trump won was the number of China hawks that staffed his administration. This was a very tough administration in terms of personnel and in terms of their view of how they saw China as an adversary, expansionist in the South China Sea and contrary to American values and friends and allies around the world,” he continued.
“So, I don’t think that that’s going to change. I think that might be mitigated a bit by the economic interaction that we have with China, but I think that it is going to be a complicated relationship going forward.” More

The Federal Reserve likely will stick to the business at hand when it wraps up its meeting Thursday with another interest rate cut.
Market attention probably will turn to what Chair Jerome Powell has to say about the future.
In keeping with policymakers’ historical desire to stay above the political fray, Powell likely will avoid direct commentary about what to expect from President-elect Donald Trump.

Federal Reserve Board Chairman Jerome Powell holds a press conference following a two-day meeting of the Federal Open Market Committee on interest rate policy in Washington, U.S., September 18, 2024. REUTERS/Tom Brenner
Tom Brenner | Reuters

The Federal Reserve likely will stick to the business at hand when it wraps up its meeting Thursday with another interest rate cut, but will have its eye on the future against a backdrop that suddenly has gotten a lot more complicated.
Financial markets are pricing in a near-certainty that the central bank’s Federal Open Market Committee will lower its benchmark borrowing cost by a quarter percentage point as it seeks to “recalibrate” policy for an economy that is seeing the inflation rate moderate and the labor market soften.

The focus, though, will turn to what’s ahead for Chair Jerome Powell and his Fed colleagues as they navigate a shifting economy — and the political earthquake of Donald Trump’s stunning victory in the presidential race.
“We think Powell will refuse to give any early judgment on the implications of the election for the economy and rates, and will seek to be a source of stability and calm,” Krishna Guha, head of global policy and central bank strategy at Evercore ISI, said in a note issued before the election’s outcome was known.
In keeping with policymakers’ historical desire to stay above the political fray, Powell “will say the Fed will take the time it needs to study the new administration’s plans” then will “refine this assessment as actual policies are developed and enacted,” Guha added.
So while the immediate action will be to stay the course and enact the cut, which equals 25 basis points, the market’s attention likely will turn to what the committee and Powell have to say about the future. The fed funds rate, which sets what banks charge each other for overnight lending but often influences consumer debt as well, is currently targeted in a range between 4.75%-5.0%.
Market pricing currently favors another quarter-point cut in December, followed by a January pause then multiple reductions through 2025.

Preparing for Trump

But if Trump’s agenda — tax cuts, higher spending and aggressive tariffs — comes to fruition, it could have a meaningful impact on a Fed trying to right-size policy after the mammoth rate hikes aimed at controlling inflation. Many economists believe another round of isolationist economic moves by Trump could reignite inflation, which held below 3% during Trump’s entire first term despite a similar recipe.
Trump was a frequent critic of Powell and the Fed during his first term, which ran from 2017-21, and is in favor of low interest rates.
“Everyone is on the lookout for future rate cuts and whether anything is telegraphed,” said Quincy Krosby, chief global strategist at LPL Financial. “Also, however, there’s the question of whether or not they can declare victory on inflation.”
Any answers to those questions would be largely left to Powell’s post-meeting news conference.
Though the committee will release its joint decision on rates, it will not provide an update on its Summary of Economic Projections, a document issued quarterly that includes consensus updates on inflation, GDP growth and unemployment, as well as the anonymous “dot plot” of individual officials’ interest rate expectations.
Beyond the January pause, there’s considerable market uncertainty about where the Fed is heading. The SEP will be updated next in December.
“What we’re going to hear more and more of is the terminal rate,” Krosby said. “That’s going to come back into the lexicon if yields continue to climb higher, and it’s not completely associated with growth.”

So where’s the end?

Traders in the fed funds futures market are betting on an aggressive pace of cuts that by the close of 2025 would take the benchmark rate to a target range of 3.75%-4.0%, or a full percentage point below the current level following September’s half percentage point cut. The Secured Overnight Financing Rate for banks is a bit more cautious, indicating a short-term rate around 4.2% at the end of next year.
“A key question here is, what’s the end point of this rate cut cycle?” said Bill English, the Fed’s former head of monetary affairs and now a finance professor at the Yale School of Management. “Fairly soon, they’ve got to think about, where do we think this rate cut period changes with the economy looking pretty strong. They may want to take a pause fairly soon and see how things develop.”
Powell also may be called on to address the Fed’s current moves to reduce the bond holdings on its balance sheet.
Since commencing the effort in June 2022, the Fed has shaved nearly $2 trillion off its holdings in Treasurys and mortgage-backed securities. Fed officials have said that the balance sheet reduction can continue even while they cut rates, though Wall Street expectations are for the run-off to end as soon as early 2025.
“They’ve been happy to just kind of leave that percolating in the background and they probably continue to do that,” English said. “But there’s going to be a lot of interest over the next few meetings. At what point do they make a further adjustment to the pace of runoffs?” More