Following Trump’s election victory, treasury yields rose sharply. Wall Street saw its best week of the year, with equities and commodities climbing. The dollar strengthened, and Bitcoin hit record highs.

U.S. Treasury bonds experienced a sharp decline on Wednesday, driving yields to multi-month highs, following Trump’s presidential election victory, which spurred expectations for economic policy shifts that may increase deficits and inflation. This week's bond market movements have notably led to a steeper yield curve, with longer-dated yields declining.

In equity markets, Wall Street closed the week on a robust upswing, delivering its strongest weekly performance of the year. The S&P 500 briefly surpassed the 6,000-point threshold, ultimately securing a 4.72% gain for the week. Large-cap stocks advanced by 4.66%, while small-cap stocks recorded their best performance since the April 2020 lockdowns, climbing 8.74%. Tesla’s market capitalisation once again crossed the $1 trillion mark, fuelled by a 31.46% surge, while Nvidia sustained its record-breaking trajectory with a 7.54% increase, positioning itself ahead of Apple as the world’s largest company. Collectively, the “Magnificent 7” stocks posted gains exceeding 11.50%.

The U.S. dollar also strengthened against the euro, reaching 0.9269. In commodities, WTI crude oil prices rose by 1.59%, as markets anticipate potential supply constraints from the incoming Trump administration’s expected tightening of sanctions on Iran and Venezuela. Additionally, oil production disruptions persist, with Gulf of Mexico drilling still suspended following Hurricane Rafael. Gold prices saw a modest decline, while Bitcoin recorded its second-best week of the year, reaching record highs above $77,000 and ending the week up 12.54%.

Trump's re-election may boost short-term spending but risks long-term fiscal strain. Consumer sentiment and services sector performance show improvement.

Trump's re-election could stimulate short-term spending but may lead to long-term fiscal strain, driven by protectionist policies, higher borrowing costs, and tariffs, potentially disrupting supply chains. His proposed tax cuts could face delays if the House leans Democratic, while high tariffs may strain U.S.-China and U.S.-Europe relations. Increased government borrowing to fund tax cuts could raise Treasury yields and borrowing costs. The Fed recently cut rates, with further cuts expected, though inflation risks from Trump’s policies may challenge this path. The services sector showed strong performance in October, bolstered by employment gains and improved delivery times. Consumer sentiment rose 3.5%, driven by optimism about personal finances and business conditions. Inflation expectations decreased slightly, remaining within pre-pandemic ranges. We expect inflation expectations to rise moderately following Trump’s victory, without a decline in short-term consumer outlook.

Trump’s re-election may boost short-term spending but risks long-term fiscal strain. Protectionist trade, immigration restrictions, and high borrowing costs could drive inflation, disrupt supply chains, and create economic challenges domestically and internationally.

Trump’s re-election presents a complex fiscal and economic landscape. Tax cuts could stimulate short-term spending but may carry long-term financial implications. While a Republican “clean sweep” of Congress may ease his fiscal agenda, anticipated tariffs, immigration restrictions, and high borrowing costs could present significant economic hurdles as his term progresses.

Trump aims to extend the Tax Cuts&Jobs Act, cut corporate taxes, and exempt tips from taxes. However, if the House of Representatives leans toward the Democrats, the passage of these measures may face delays or dilution. In addition, the federal debt limit must be addressed quickly in early 2025 to avoid the risks of government shutdown, which could affect market stability. Trump’s stance on reducing government spending through cuts to environmental and regulatory frameworks could shape the US economic environment, but it also raises questions about long-term fiscal sustainability.

Trump’s early immigration policies may involve widespread deportations and stricter entry controls, particularly at the southern border, impacting sectors reliant on foreign labour, such as agriculture and hospitality. As the native-born workforce shrinks, reduced access to foreign labour could drive wages and inflation higher, potentially disrupting supply chains and productivity. His “America First” agenda is likely to prioritize protectionist trade actions, with possible tariffs up to 60% on Chinese imports and 10-20% on goods from regions like Europe. Initial measures may begin in Q3 2025, with a phased rollout likely in Q4 2025 or Q1 2026 to minimize economic shocks. China would be targeted first, with additional tariffs on imports from other countries implemented gradually.

This protectionist shift may strain U.S. relations with key trading partners, potentially disrupting international supply chains. High tariffs could challenge American retailers and consumers, diminishing household purchasing power. A trade conflict with Europe could further destabilize the Eurozone economy, pushing it toward recession. Trump’s transactional diplomacy style may introduce fluctuations in U.S.-NATO relations, impacting ongoing conflicts, especially in Ukraine, where he may condition aid to encourage a negotiated resolution.

To finance his tax cuts and trade measures, increased government borrowing may drive Treasury yields higher, signalling increased risk premiums demanded by investors. This could also exert upward pressure on corporate borrowing costs, potentially leading to Fed interventions if tariff-induced inflation amplifies fiscal strains. In response, the 10-year Treasury yield may see moderate increases, along with a short-term tightening of U.S. credit spreads, though longer-term credit risks remain amid inflationary pressures. Trump’s fiscal policies and protectionist stance are likely to strengthen the dollar, especially against the euro and emerging market currencies. Emerging market economies with strong U.S. trade links may face heightened currency volatility as protectionist measures ripple through global markets.

We believe a Trump victory could affect inflation, likely slowing its decline. Inflation may remain stubbornly high at current levels, with potential for occasional upward spikes. This scenario could benefit both the bond and gold markets.

The Federal Reserve cut rates by 25 bp to 4.5-4.75%, with further cuts expected. Inflation risks and fiscal policies may influence future decisions, while market adjustments continue.

The Fed has implemented a 25 bp rate cut, adjusting the federal funds target range to 4.5-4.75%. Fed Chair Jerome Powell emphasized that while the monetary policy remains restrictive, future rate cuts may proceed more cautiously. This measured approach is reflective of the Fed's cautious outlook, aimed at keeping inflation on track to reach its 2% target. Powell refrained from extensive comments on the potential effects of the Trump administration’s fiscal policies, stating that such factors would only be incorporated into the Fed’s models once enacted.

Market expectations indicate another 25 bp rate cut in December, followed by a potential pause in early 2025. The federal funds terminal rate is projected to settle around 3.5-3.75% as inflation stabilizes and labour market growth slows without a sharp downturn. However, the Fed remains cautious about inflationary risks posed by Trump’s fiscal policies, including expanded tax cuts and trade protections, which could disrupt the current rate-cut trajectory. Meanwhile, the yield curve is normalizing, with short-term rates expected to decline, while medium and long-term rates are likely to rise. A combination of tighter fiscal policy and a more restrictive Fed stance may continue to support government bonds through 2025.

We expect the Fed to implement another rate cut in December. While achieving target inflation levels will be challenging, we do not foresee significant changes in the overall monetary policy approach for the remainder of 2024.

Services PMI strengthened, fuelled by employment and delivery improvements, while concerns about political instability and disruptions remained significant.

The Services sector displayed an exceptionally strong performance in October 2024, reaching levels not seen since August 2022. The US ISM Services PMI surged to 56, surpassing expectations of 53.8. This notable increase was primarily driven by a robust recovery in employment, rising to 53 from 48.1, and an improvement in supplier delivery times, which rose to 56.4 from 52.1 after two months of contraction or accelerated delivery. Additionally, price pressures moderated slightly, with the index easing from 59.4 to 58.1.

However, some areas showed slower growth, including business activity/output, which decreased from 59.9 to 57.2, and new orders, which dropped from 59.4 to 57.4. Inventory levels also showed a slight slowdown, falling from 58.1 to 57.2, while the backlog index further contracted to 47.7 from 48.3. Among respondents, the greatest concerns were political uncertainty, the impacts of the hurricane, and labour disruptions at ports, although many respondents noted that the longshoremen's strike had a less significant impact than anticipated due to its short duration.

The services sector remains a cornerstone of U.S. economic growth. We expect it to mitigate weakness in the manufacturing sector during the Q4.

Consumer sentiment rose 3.5%, driven by stronger expectations in finances and business conditions. Inflation expectations slightly decreased, remaining within pre-pandemic ranges for the year ahead.

Consumer sentiment has shown continued improvement, rising for the fourth consecutive month by 3.5%, reaching its highest level in 6-months. While current conditions remained relatively unchanged, the expectations index experienced a significant increase across all dimensions, marking its highest reading since July 2021. Expectations regarding personal finances rose by 6%, driven by stronger income prospects, while short-term business conditions surged by 9% in November. Long-term business conditions also advanced, reaching their most favourable level in nearly four years. As a result, sentiment is now approximately 50% above its June 2022 trough, although it remains below pre-pandemic levels. It is important to note that the data for this release was collected before Monday, and therefore does not reflect any reactions to the election results.

Year-ahead inflation expectations slightly decreased from 2.7% last month to 2.6% this month, marking the lowest reading since December 2020. This level remains within the 2.3%-3.0% range observed during the two years preceding the pandemic. Long-term inflation expectations inched up from 3.0% last month to 3.1% this month, staying modestly elevated compared to the pre-pandemic range.

In the wake of Trump's victory, we anticipate a modest increase in inflation expectations for both the short and long term. We do not foresee a decline in short-term consumer expectations.