US: Uncertainty surrounding Trump prevails – Rabobank

Elwin de Groot, Senior Eurozone Strategist at Rabobank, suggests that the thinking here is that the Trump’s proposed stimulus measures, which would include both increased government (investment) spending and tax cuts, have the potential to fuel growth and raise inflation.

Key Quotes

“Meanwhile, Trump’s protectionist views, which, if enacted, would imply one-off (negative) supply shocks to the US economy, are also feeding into the longer-term inflation pressures story. The 5y5y US inflation swap forward has jumped by a whopping 25bp in just a few days, returning it to the levels seen in mid-2015. Perhaps even more remarkable is that these long-term inflation concerns have also infected European markets, where the 5y5y forward has moved above 1.5%, a level not seen since January. Obviously this also explains the Bunds sell-off.”

“Before the elections there were concerns that a Trump victory, and the resulting uncertainty, might cause the Fed to hold off on a rate hike in December. Clearly, this concern has evaporated, despite heightened volatility, as markets around the world have rallied. Furthermore, the US jobless claims released yesterday came in better than expected, so the labour market is still going strong. This makes Trump –or, better, potential market volatility in the wake of his election– the only factor that could still prevent a Fed hike in December. It appears that the market’s focus has shifted from December 2016 to 2017 as the market’s implied pace of the Fed’s tightening cycle has increased on the back of higher inflation expectations.”

“Still, the story doesn’t entirely add up. For example, the Bloomberg commodity index has barely moved since Tuesday. The expectation of a large fiscal stimulus package also ignores the potential challenges such a package might face in a Republican-dominated Congress. Furthermore, it ignores the possible impact of a trade war and ensuing uncertainty for the global economy.”