Gilles Moec Macrocast: Fast and Furious?
- 11 November 2024 (10 min read)
It seems the Republican party is on course for a “full sweep” and control the White House and the two houses of Congress - Just. In addition, the new administration will be able to count on a sympathetic Supreme Court. This will incentivise the President-elect to try to deliver quickly on his platform. He has 22 months from his inauguration to the mid-term elections to act with a wide room for manoeuvre. He may still find some obstacles on his fiscal loosening path though: while a politically aligned Congress makes it easier to pass a budget through “reconciliation”, keeping all the nuances of the Republican caucus together through this complex process will not be straightforward. This means Donald Trump may focus on areas on which he has more leeway through executive orders: immigration and tariffs. The market has reacted to his victory by expecting more inflation but also much more growth. If the fiscal sugar rush comes only after the potentially disruptive decisions on immigration and tariffs, perceptions may change. The market may be the main source of “check and balance” on the new administration’s instincts.
The Fed’s reaction will of course be a key ingredient in any market revision of its assessment of Trump 2.0. Jay Powell kept his cards close to his chest last week. Yes, the Fed cut by 25 bps, but he refused to embark on any kind of forward guidance, even for the December meeting. Another 25-bps cut next month is our baseline, but we think the Fed will stop at 4.25% in March, 50 bps higher than what the market is currently pricing for the terminal rate.
The Euro area will find itself in a complicated position – and the underwhelming stimulus announced by Beijing last week will not help shore up confidence among European exporters. We think the ECB will need to look through a not entirely spotless short-term outlook for inflation and engage in a more forceful restriction removal path. The market briefly interpreted the political crisis in Germany as the promise of some fiscal loosening ahead. We think this will be a very uncertain and slow process. In the UK, conversely, a spendthrift budget is already impacting the central bank’s trajectory.
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