Outlook Overview: The Trump Effect- Tariffs, Fiscal Shifts and Geopolitics

·        The U.S. economy momentum remains reasonable before President elect Trump’s policies impact in 2025 and 2026.  While high uncertainty exists on the scale and timing of policies, the strategic bias is clear – sizeable tax cuts that will boost the budget deficit; tariffs (threats and actual) to get trade and other concessions; immigration crackdown and less war in the world. This led us to see a boost to the U.S. economy and inflation into 2026, which will likely cause the Fed to end easing at 3.75-4.00% by June 2025 and undertake 75bps of tightening in 2026. 

·        The economic and policy outlooks for other countries around the world depend on the spill over of new U.S. policies but also divergent domestic conditions. In DM, EZ recovery is slow due to lagged energy price shock/ECB tightening still feeding through, and the high prospect of some tariffs against Germany and/or EU.  Though Germany will likely undertake fiscal stimulus and relax its debt brake post-election/other EZ countries and the EU are unlikely to.  ECB policy rates are thus set to fall to 2% in 2025. On balance, we also feel that a ceasefire will be seen in Ukraine in 2025 followed by multi-party peace talks, which will reduce geopolitical uncertainty. Other European countries will also extend easing, especially the UK.  BOJ policy tightening will also continue in H1 2025, as inflation remains high enough for some further policy normalization before Japan’s economy slows and the policy rate peaks at 0.5%.

·        In EM, China will likely see a true stimulus package of Yuan3-5trn in 2025, plus Yuan weakness to partially counterbalance the adverse effects of a trade war on growth, with 4.5% GDP growth is likely for 2025 and 2026.  Other Asia EM countries will have to deal with the spillover from trade wars including Yuan weakness, plus an initially generally strong USD in H1 2025, which will slow policy easing.  However, these headwinds can ease late 2025, as we expect a new U.S./China trade deal to ease tensions. 

·        Other major EM are divergent, though we feel that Mexico will likely reach a deal with the Trump administration in 2025, as it compromises to keep the important relationship with the U.S.  Meanwhile, though the Trump administration will return to maximum pressure on Iran, Donald Trump has no interest in starting a war.   

·        For financial markets, 2025 will likely be a game of two halves.  US exceptionalism will likely drive US equities to extend outperformance in H1, while the USD rises further as tariff (threats and actual) escalate.  However, 10yr U.S. Treasury yields will likely push higher, which can hurt the U.S. equity market and the USD will likely lose ground in H2 on concerns about the U.S. economy medium term against a backdrop of an overvalued USD.  10yr U.S. yields can spike to 5% and prompt a U.S. equity market correction in 2026. Ex U.S. Equities will likely have a choppy 2025, but India and Brazil look good in 2026. Germany and UK can decouple with no rise in 10yr yields, as the ECB and BOE keeps easing.

·        Risks to our views: If new fiscal policy stimulus is moderate rather than aggressive and tariffs are targeted, then the U.S. inflation risks would be less and the Fed could continue easing in H2 2025.  Alternatively, an 8-9% of GDP budget deficit could see intense funding pressure that drives up 10yr U.S. yields to above 5.5% that hurts the U.S. economy, and causes a bear market in U.S. equities.