Macroeconomics

Four fears from Trump 2.0

19 January 2024 • 5 mins read

Republican presidential candidate and former President Donald Trump speaks during a campaign rally at the Grappone Convention Center on 19 January 2024. AFP.

  • Investors are starting to evaluate the risks from Donald Trump winning November’s elections after his victory in Iowa’s Republican primary this week. We see four key macroeconomic risks here.
  • Trump is considering a 10% tariff for all goods imports. This would spark inflation, stop Federal Reserve rate cuts and make the USD surge, hitting major exporters’ currencies: EUR, CNY and JPY.
  • A replay of his first term’s corporate tax cuts may spur equities but a larger budget deficit and spiking Treasury yields would be a worse risk.
  • Fed independence may be threatened and, last, uncertainty about the rule of law if Trump targets opponents at home and the global order if the US pulls out of NATO may also hurt risk assets.
Investors are starting to evaluate the risks from Donald Trump winning November’s US presidential elections after his victory in Iowa’s Republican primary this week. We see four key macroeconomic risks here.

Source: Bank of Singapore, Bloomberg

Firstly, if Trump returns to the White House in January 2025, he has threatened a 10% tariff for all goods entering the US. This would be far more wide-ranging than his first term tariffs on Chinese exports and all US steel and aluminium imports. It would spark inflation, stop the Federal Reserve cutting interest rates and make the USD surge, hitting the currencies of major exporters including the EUR, CNY and JPY. The first chart shows the CNY plunged from 6.25 to 7.20 versus the USD when the US imposed three rounds of tariffs on Chinese goods in 2018-19.

Source: Bank of Singapore, Bloomberg

Secondly, a replay of Trump’s first term corporate tax cuts may spur equities, but a larger budget deficit and spiking Treasury yields would be a greater risk.

Since the 2020 pandemic caused budget deficits to soar, bond markets have become highly sensitive to worsening public finances. The chart above shows the US fiscal deficit is already very high near 8% of GDP owing to President Biden’s semiconductor, infrastructure and green energy spending. In 2022, UK bond yields surged when former Prime Minister Truss slashed taxes. In 2025, Treasury yields could also jump if US corporate tax cuts were not funded by government spending reductions.

Thirdly, the Fed’s independence may be threatened. A second Trump term may lead to political pressure to keep interest rates low. The president could also replace the Fed Chair when Powell’s current term ends in early 2026 with a more pliant successor. Fears about the Fed’s status may cause Treasury yields to soar, hitting financial markets globally.

Fourthly, risks assets could also fall if a second Trump terms leads to uncertainty about the rule of law and chaotic policymaking: for example, if the president uses federal agencies to target opponents at home or pulled out of NATO, abandoned allies abroad, refused to aid Ukraine or shocked China on Taiwan.

In short, financial market volatility may increase sharply under a second Trump term in 2025. Investors will thus continue tracking US politics closely in 2024.

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Author:
Mansoor Mohi-uddin
Chief Economist
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