Trade
Our thoughts on this morning’s CPI release and some upside risks to inflation that could flare up in the months ahead.
For our last publication of the year, we explore five key themes that will dominate the European macro landscape and markets next year. While the start of 2025 will be challenging for European assets, the latter part will offer some much-needed relief.
- Congress will pass tax cuts by end of 2025 producing a fiscal thrust of about 0.9% of GDP in 2026.
- Trump will count on that stimulus as a basis for slapping tariffs on leading trade partners.
- China will retaliate against Trump and stimulate its domestic economy, while pursuing stronger trade ties with other countries. Europe will also retaliate.
- Geopolitical risk will shift from Ukraine-Russia to Israel-Iran, where the conflict will continue to escalate until a crisis point is reached within 2025.
This month, our Here, There, And Everywhere Chartpack summarizes our main thesis for 2025: the three main narratives driving markets today – fiscal profligacy, trade war, and geopolitical conflict – will peak at some point in 2025.
Investors have given up on European assets, which now suffer exceptional discounts to US ones. However, tighter US fiscal policy, the end of Europe’s austerity and deleveraging, the LNG Tsunami about to hit European shores, and the global capex fueled by the Impossible Geopolitical Trinity mean that Europe’s time to shine will soon come back.
Investors have given up on European assets, which now suffer exceptional discounts to US ones. However, tighter US fiscal policy, the end of Europe’s austerity and deleveraging, the LNG Tsunami about to hit European shores, and the global capex fueled by the Impossible Geopolitical Trinity mean that Europe’s time to shine will soon come back.
Investors are overstating the positive fiscal impact of the Trump presidency. The bond market will have something to say about the scope for further deficit expansion via tax cuts. As such, the trade after the trade of the Trump 2.0 administration may involve less growth out of the US, not more. In the interim, however, investors should continue to expect higher yields and increased equity volatility. There are plenty of risks ahead, including geopolitics, trade, and uncertainty surrounding fiscal policy.
Ultimately, 2024 is not 2016 — a seemingly obvious point, but one with market relevance. In 2016, voters gave Trump a strong mandate for nominal GDP growth. It is not clear if this is the case today. Inflation is the most important issue, least relevant is trade and globalization. As such, Trump’s renewed mandate is for supply side reforms, not more populism and protectionism.
The prospect of a new trade war more than offsets the other pro-business parts of Trump’s agenda. With the labor market already weakening going into the election, we are raising our 12-month US recession probability from 65% to 75%.
As the odds of a Trump victory rise, European assets underperform US ones. What would be the immediate impact of a Trump victory on European stocks?
The global political system is destabilizing and the US will turn more hawkish in foreign policy, trade policy, or both, regardless of the election outcome. Tactically go long the dollar.