The Trump restoration was resonating across financial markets on Wednesday with the prospect that Donald Trump’s second presidential administration will almost certainly bolster economic conditions should a round of tax cuts occur next year.
Under such conditions, one should expect rising disposable incomes and higher long-term yields on Treasury notes, as well as upward pressure on prices, if the next Trump administration adopts robust tariffs.
The U.S. dollar rose against 16 major trading currencies early Wednesday, including a 2.5% gain against the Mexican peso, a 1.81% appreciation against the Japanese yen, a 1.43% gain against the British pound and a 2.18% increase against the euro.
The rise is because of expectations of a tax cut, which would stimulate economic activity, and a lighter regulatory framework that would favor technology and artificial intelligence firms, which will continue to attract capital into the United States and create the conditions for a strong dollar.
This is why equity markets had strong gains in early trading on Wednesday. It is also why investors pushed the yield on the 10-year Treasury note higher to 4.46% as the trading community priced in a faster pace of growth. Financial markets, while always important, are about to become more important to the economy given the prospective economic, financial and trade policies of the Trump administration.
One of the more interesting aspects of the Trump election will be just how turbocharged the economy becomes should there be another round of tax cuts. One should also anticipate a reduction in immigration, which should prompt policymakers, investors and firm managers to assess labor market conditions going forward. Should the labor supply be reduced through immigration policy, it is possible that the unemployment rate will decline and that wages will increase.
A hotter economy accompanied by rising wage-push inflation cannot be discounted and should be included into the economic risk matrix. We have made the case for some time that the shocks of the pandemic resulted in major structural changes to the global economy that were accompanied by rising geopolitical tensions. One result was higher inflation, requiring higher policy rates from the Federal Reserve. Now, when the likely policies of a second Trump administration are factored in, a new risk matrix will emerge.
