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The ‘Big Trump Rethink’ on Economy: HFE Economists

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Donald Trump’s unexpected presidential win has rallied stocks and routed bonds, especially Treasuries, but how long those moves and sentiments last will depend on what Trump actually does once he takes office. Already stocks have retreated slightly from recent market highs and bonds have moved off recent lows.

“Markets are going through a big Trump rethink,” said Carl Weinberg, chief economist at High Frequency Economics and co-host of a webinar on its implications for the U.S. and Global Economy. Markets are hoping Trump will be practical and market friendly but don’t really know yet if that will be the case, according to Weinberg. “We have a lot of questions, not a lot of answers.”

Trump offered policy pledges during the campaign and recently released a plan for his first 100 days, but Weinberg advised, “Don’t take his campaign rhetoric and specific proposals too literally.”

He and Jim O’Sullivan, HFE’s chief U.S. economist, discussed several key items on the Trump policy agenda, however, that investors should be watching now because of their potential impact on the U.S. economy and financial markets.

Trade Policy

“Trump has the ability to start a trade war” and that threat “is hanging over markets,” said O’Sullivan. His first 100 days plan includes a pledge to renegotiate or withdraw from NAFTA, establish tariffs to discourage companies from relocating to other countries and laying off workers in the U.S. and label China a currency manipulator.

“Trade is where the mischief can occur most easily,” said Weinberg. “The president has a lot of discretion over tariffs and treaties but the reality is that Trump may not be able to do a lot.” During the campaign Trump threatened 45% tariffs on Chinese imports and 35% on imports from Mexico.

(Related: Trump on Trade: Some Risk, but Recession ‘Not Likely,’ Kleintop Says)

“Anything aimed at Mexico could spill over to other countries, particularly Canada,” said Weinberg. If such policies are realized, they will ultimately spill over into the U.S. in the form of higher prices for consumers, according to Weinberg.

He explained that since American car parts are imported from Mexico, Canada and Asia, tariffs on those imports would raise the price of many American cars. “If tariffs affect the flow from Canada then you are impacting the price of every Chrysler assembled in the U.S.,” said Weinberg.

Ford Motor Co.’s CEO Mark Fields on Tuesday, said a 35% tariff on imports from Mexico, where Ford also manufactures cars, “would have a huge impact on the U.S. economy.”

Given those consequences Trump might just use the threat of tariffs to renegotiate trade pacts such as NAFTA in favor of the U.S., according to Weinberg.

Weinberg expects Trump will have difficulty declaring China a currency manipulator because the yuan has been appreciating and People’s Bank of China has been intervening in markets to prevent a big drop in the currency. Ironically, since Trump’s election the yuan has fallen sharply to an eight-year low against the dollar due to his rhetoric.


Trump’s policies for the oil market, like his policies for trade, could also have mixed results. Trump plans to lift the restrictions on the production of $50 trillion dollars’ worth of American energy reserves, including shale, oil, natural gas and clean coal.

While that sounds great for the U.S. economy it could be “toxic for global oil markets,” because it could lower global oil prices, said Weinberg. In turn, lower oil prices could cause “sovereign failures” among developing oil-producing economies like Nigeria and Venezuela, said Weinberg.

Infrastructure Spending and Tax Cuts

Trump’s 100-day action plan includes leveraging “public-private partnerships, and private investments through tax incentives to spur $1 trillion in infrastructure investment over ten years” and tax cuts for families and corporations.

Trump’s plan would slash the number of personal income tax brackets from seven to three, lowering the top rate from 39.6% to 33%; slash the corporate tax rate from 35% to 15%; and allow corporate funds held overseas to be repatriated at a 10% rate.

O’Sullivan said the tax cut is “more significant than infrastructure program” because the latter will take time to implement but noted that both plans are likely to be reduced because many Republicans may be concerned about increasing the deficit.

“Bottom line for the markets: not as much initial fiscal stimulus and maybe consolidation in bond yields,” said O’Sullivan. He’s raised his growth forecast to 2.7% from 2.2% for the second half of 2017.

Market Reaction to Trump’s Plans

“We will probably get a little more inflation at the least and little more Fed tightening at the least” as a result of a Trump presidency, according to Weinberg. “We’ve ready we’ve seen bond yields higher.”

O’Sullivan expects bond yields will continue to rise in the next year or two and is targeting the 10-year Treasury yield at 2.6% for the end of 2017 and 3% for the end of 2018. The 10-year Treasury was yielding 2.23% as of Tuesday’s market close.

O’Sullivan also expects the Fed will hike rates 100 basis points between now and the end of 2017 and another 100 basis points by the end of 2018 — “double what’s priced into bond markets now.”

Ultimately “what happens to bond yields, the dollar and the Fed will depend on the Trump Administration and the economy,” said O’Sullivan.

In the meantime, both O’Sullivan and Weinberg will be watching for announcements about Trump’s Cabinet picks and await Janet Yellen’s appearance on Thursday before the Joint Economic Committee, on the Fed’s economic outlook. They expect Yellen will serve out her term as Fed Chair, which ends runs through February 3, 2018, but not her term as a member of the Fed’s Board of Governors which ends in early 2024.

During the presidential campaign Trump criticized the Yellen for maintaining low rates for too long and said he would mostly likely replace her when “her time is up.”

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