Economy

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In notes on Wednesday, analysts from Bank of America and Morgan Stanley (NYSE:MS) highlighted economic shifts that may impact markets.The future of fiscal policy remains uncertain, largely dependent on whether Republicans gain control of the House of Representatives. Bank of America notes that a Republican sweep could lead to a “more expansionary” fiscal policy, which may involve extending key tax cuts under the Tax Cuts and Jobs Act (TCJA).However, a divided government would require bipartisan agreement, potentially limiting deficit growth.Morgan Stanley emphasizes that control of the House is critical, as it will influence how market expectations evolve, especially for U.S. Treasury yields.Both banks anticipate an immediate shift towards higher tariffs, with BofA projecting that tariffs on Chinese imports will likely increase “in short order.”Morgan Stanley agrees, noting that trade actions could extend to Europe and Mexico as well. Unlike Trump’s first term, analysts suggest that tariffs could take priority over fiscal stimulus, potentially challenging economic growth while reinforcing a “strong dollar” policy.”The former president has stated a preference for a weaker US dollar. But we think the policies Trump has advocated for likely lead USD higher, as it did overnight,” said the bank. “This fundamental rationale is due to increased tariff risk, geopolitical uncertainty, and expectations for a moreexpansionary fiscal agenda.”On deregulation, BofA sees a likely reduction in regulatory burdens, especially in sectors like energy and financial services, which could serve as a growth catalyst. However, restrictions on immigration could impact labor supply and slow GDP growth, potentially affecting industries reliant on immigrant labor.The dollar has strengthened following the news as investors price in tariffs and deficit expansion. U.S. Treasury yields also climbed, with BofA projecting a trading range for the 10-year yield between 4.25% and 4.75% More

BRASILIA (Reuters) – Brazil’s Finance Minister said on Wednesday the government has concluded talks on new measures to strengthen the fiscal framework, seen as crucial to improve the valuation of the country’s risk assets, which have been hit by fiscal concerns and volatility linked to the U.S. election.Following Republican Donald Trump’s White House victory, the Brazilian real opened down more than 1.7% against the U.S. dollar, while long-term interest rates jumped. Speaking to reporters, minister Fernando Haddad noted that global tensions had increased, fueled by remarks made during the Republican’s campaign. However, he pointed out that Trump’s post-victory speech was more moderate.”We need to wait a bit and focus on taking care of our own house – taking care of Brazil, our finances, and the economy – to be as little affected as possible, whatever the external scenario may be,” he said.Even before the U.S. election results were announced, Trump’s rhetoric was already viewed as more detrimental to emerging markets due to potential inflationary pressures arising from his strong support for higher import tariffs, tax cuts, and immigration restrictions.This approach boosts the U.S. dollar against other currencies and fuels expectations of higher interest rates in the world’s largest economy, drawing resources away from other markets.Haddad stressed that discussions that President Luiz Inacio Lula da Silva had requested with other ministries to review the new fiscal measures the country will announce have been completed.”All the ministers are well aware of our task ahead to reinforce the fiscal framework and ensure predictability and sustainability of finances in the medium and long term,” Haddad said. “I believe there is consensus on the principle,” he added, without providing details on the package’s content.Reuters reported on Tuesday that the government is preparing measures to curb spending, including a proposal to cap health and education expenses under the general limit already applied to other expenditures. Haddad said Lula will submit the measures to Congress once he is informed that work by the Chief of Staff’s office, along with the Finance and Planning ministries, has been completed.However, he noted that the leftist leader will possibly discuss the measures with the heads of the Senate and Lower House before taking that step. More

(Reuters) – Brazil’s annual inflation is forecast to have reached a one-year high in October on steeper energy and meat prices caused by a severe drought, while a host of risks continue to muddy the outlook for 2025, a Reuters poll found.Facing a number of worrying trends, Banco Central do Brasil (BCB) is likely to deliver a 50 basis-point rate hike to 11.25% later on Wednesday, in contrast to its global peers in policy easing mode.The IPCA inflation index, to be released on Friday, is expected to have risen to 4.72% last month from a year earlier, the highest since 4.82% in October 2023, according to the median estimate of 18 economists polled Oct. 30-Nov. 4.It would also be the first time since January the 12-month measure breaches a wide official goal of 3% plus/minus 1.5 percentage points. The monthly variation is projected to come in at 0.53%, the fastest since 0.83% in February. “The highest single-item contribution could come from electricity prices, reflecting increased tariffs for households…(and) food prices may accelerate vs. September on rising protein prices,” UBS analysts wrote in a report.Recent rains have improved conditions for agricultural production and energy output, alleviating pressures in those sectors this month. But the dry period is not over yet in the Southern Hemisphere – and there are other risks. Barclays (LON:BARC) analysts wrote in a report the central bank could keep raising its benchmark rate to 12.75% in the first half of 2025 “given persistent BRL weakness, lingering fiscal uncertainty and climate-related shocks to current inflation.”Costs of imported goods and services in the country have increased this year following a 16% drop in the value of the Brazilian real, related in part to investor worries over a complex budget picture.Seeking to address those concerns, the government is preparing measures to curb spending that would put health and education expenditures under a general cap that already applies to other outlays.Initial optimism over fiscal dynamics in President Luiz Inacio Lula da Silva’s term dissipated this year as, despite improving tax revenues, public spending remains a challenge that is driving up long-term inflation expectations. (Reporting and polling by Gabriel Burin; Editing by Peter Graff) More

MEXICO CITY (Reuters) – Mexico must maneuver carefully now that Donald Trump has secured his return to the U.S. presidency, but Mexico’s President Claudia Sheinbaum still has room to negotiate and soften the impact on trade, migration and security.Trump’s campaign rhetoric, including 200% tariffs on cars coming from Mexico, mass deportations, and U.S. military action against drug cartels, puts Sheinbaum in a difficult position. An initial deterioration in the relationship between the two countries – and a blow to the Mexican peso – is likely.   But in the longer term, analysts say, Mexico has some leverage, particularly on migration, that could help dilute some of Trump’s pledges in areas such as trade and security.”What we know about Trump is that he is transactional,” said Mariana Campero, senior associate with the CSIS Americas Program.Campero said Sheinbaum – who took office last month – will be best served by taking a page from the playbook of her mentor and predecessor, Andres Manuel Lopez Obrador. Lopez Obrador found a way to work with Trump during his first term, delivering greater enforcement on migration and steering relations clear of the U.S. economic policy options that would have been most damaging to Mexico.”Sheinbaum could say ‘Okay, Mexico can take (deported) Mexican nationals back, but you won’t impose the tariffs,'” Campero added.Mexico could also lean on U.S. companies, many of which benefit significantly from the North American USMCA trade pact, to lobby against major tariff increases. The current USMCA was negotiated under Trump and ended up far less damaging for Mexico than Mexican officials had initially feared.USMCA is up for review in 2026 and those discussions are set to be a key moment in the Sheinbaum-Trump relationship. Mexico will likely start preparing right away with “a better defined and more aggressive strategy” to identify politicians who could be good at communicating with Trump, said Antonio Ocaranza, who was spokesman under former President Ernesto Zedillo.Sheinbaum’s appointment of Economy Minister Marcelo Ebrard – a former foreign relations chief under Lopez Obrador who has personal experience dealing with Trump – was seen as a powerful signal that Mexico is readying itself with its best political firepower for the USMCA review, analysts said. Another area of potential tension is China.Despite U.S. pressure, Mexico has let Chinese companies expand their presence in recent years and is considering an incentive program open to companies from any country interested in investing in Mexico.Trump, meanwhile, has pledged a 60% tariff on Chinese goods and at least a 10% levy on all other imports.Mexico’s incentive program to attract investment- which does not exclude China – could set it on a collision course with the Trump administration. “This is not good news in the sense of what is coming up for the bilateral relationship,” said Lila Abed, director of the Washington-based Wilson Center’s Mexico Institute, adding that Mexico’s dealings with China could be a major sticking point in the USMCA review.  When it comes to drugs and security, Mexico will also be expecting a rough ride. Sheinbaum’s administration is acutely aware that curbing the flow of fentanyl, the deadly synthetic opioid killing tens of thousands of Americans a year, will be high on the agenda between the two leaders, analysts said. Sheinbaum will need to be prepared to cooperate, and show results, in order to gain the political capital needed to avert Trump’s more radical ideas – such as U.S. military intervention against Mexican cartels.Any such incursion would risk huge damage to relations between the interdependent economies but cannot be ignored, according to Abed. “I think it’s a real option that’s on the table,” she said.     More

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BEIJING (Reuters) – China will work with the U.S. on the basis of mutual respect, it said on Wednesday as Donald Trump closed in on victory in the presidential election, but strategists said Beijing was bracing for bitter superpower rivalry over trade, technology and security issues.”Our policy towards the U.S. is consistent,” foreign ministry spokesperson Mao Ning told a regular press conference in Beijing, when asked how Trump returning to the Oval Office would affect U.S.-China relations. “We will continue to view and handle China-U.S. relations in accordance with the principles of mutual respect, peaceful co-existence and win-win cooperation,” she added.Chinese strategists however said they expected more fiery rhetoric and potentially crippling tariffs from Trump, although some said his isolationist foreign policy could give Beijing a vacuum to expand its global influence.”Beijing anticipated a close race in the U.S. election. Although Trump’s victory is not China’s preferred outcome and raises concerns, it is not entirely unexpected,” said Tong Zhao, senior fellow at the Carnegie Endowment for International Peace. “The Chinese leadership will likely strive to maintain an appearance of a cordial personal relationship with Trump, while intensifying efforts to project China’s power and strength.”Da Wei, director of the Center for International Security and Strategy at Tsinghua University in Beijing, said Trump’s victory “may pose a relatively large challenge to Sino-U.S. relations” based on his campaign policy proposals and actions in his previous term.”Due to Trump’s high unpredictability, I think it is difficult for China to say that there is a fully formed plan to do “x” when Trump comes to power. It also depends on what policies the Trump administration implements.”TRUMP TARIFF THREATTrump has proposed tariffs on Chinese imports in excess of 60% and ending China’s most-favoured-nation trading status, and analysts say the prospect of a trade war has rattled China’s leadership.China sells goods worth more than $400 billion annually to the U.S. and hundreds of billions more in components for products Americans buy from elsewhere.”Beijing is particularly wary of a potential revival of the trade war under Trump, especially as China currently faces significant internal economic challenges,” said Zhao. “China also expects Trump to accelerate the decoupling of technologies and supply chains, a move that could threaten China’s economic growth and indirectly impact its social and political stability.”In response, China is likely to intensify its push for greater technological and economic self-sufficiency, while feeling more pressure to bolster economic ties with countries like Russia, he added.”Going forward, Beijing would likely be drawing up a list of clear bargains and interest tradeoffs that it could float with Washington, in hope that it can focus on its much needed domestic economic concerns whilst Trump’s attention is occupied elsewhere,” said Brian Wong, assistant professor at the University of Hong Kong who studies grand strategy. GLOBAL POWER VACUUMChina is likely to shore up ties with the Global South, Europe and Northeast Asian countries in the event of a Trump win, given his “transactional, isolationist, anti-globalist and anti-multilateral foreign policy”, said Wong.Chinese President Xi Jinping and Indian Prime Minister Narendra Modi reached a rare rapprochement last month, while Beijing has tentatively reached out to the new Japanese administration this autumn following years of strained relations.”China expects the second Trump administration to further disengage from international agreements and commitments, creating opportunities for China to expand its influence in emerging power vacuums,” Zhao added.Trump has unnerved democratically governed Taiwan by saying it should pay Washington for its defence and that it had taken U.S. semiconductor business. “The Biden administration applied high-pressure tactics to China on Taiwan, with U.S. troops stationed in Taiwan and even giving weapons to Taiwan … in a huge break with the former Trump administration’s Taiwan policy,” said Shen Dingli, an international relations scholar in Shanghai. Washington last month approved a US$2 billion arms sale to Taiwan.”Trump is not too likely to give Taiwan the same support in future.” (This story has been corrected to change the time element in paragraph 1) More

A UBS equity strategist said he expects that such an outcome would maintain a moderately favorable environment for stocks, supported by a lighter regulatory load across sectors like real estate, energy, and financials.A divided Congress could prevent sweeping policy changes, leading to a steady market environment. UBS’s credit team suggests that much of the market has already priced in this scenario, with high-yield spreads near 270 basis points and investment-grade spreads around 80 basis points.They also project the 10-year Treasury yield could rise to about 4.4% in this scenario.However, UBS warns that a clean Republican sweep—though considered unlikely—could also create some volatility. Under this outcome, Golub estimates a slightly lower S&P 500 target of 6,375, while credit spreads could tighten as yields edge higher.Additionally, UBS’s FX team notes that a full Republican sweep might bolster the U.S. dollar more than a divided Congress would due to expected tax cuts and regulatory shifts.A Red Sweep would likely bring the corporate tax rate reduction from 21% to 15%, generating an estimated $598 billion benefit over ten years. UBS analysts suggest this could initially boost equities but caution against medium-term impacts, as 2026 is expected to bring a worse growth/inflation mix, driven in part by a possible 60% tariff on a significant portion of Chinese imports, which could trim U.S. GDP by up to 0.6%.Even under a divided Congress, UBS forecasts an additional $3.1 trillion in government debt over the next decade, posing long-term challenges for fiscal policy and potential upward pressure on bond yields. More