Weekly focus: Stronger Dollar and higher yields after Trump victory

Donald Trump won the US election to become the next president, and it seems that the Republicans likely won a majority in both chambers of Congress. Trump was slim favourite ahead of the election, so the result was partially priced in already, but there was still a clear market reaction in that bond yields are up by some 10bp, the USD has strengthened around 1% and US stock prices are up by 4-5%. As has been the case for months, the market expects a Trump administration to mean an even more expansionary fiscal policy, higher tariffs (which imply a stronger USD) and deregulation, which could improve corporate earnings.

At its meeting just after the election, the US central bank delivered a 25bp rate cut as expected and did not send any new signals regarding the rate outlook. Part of the increase in bond yields since and just before the election is driven by higher inflation expectations, as the Trump policy agenda is seen as more inflationary. If this continues, it could eventually lead to the Fed becoming more hawkish and signalling that rate cuts could end earlier, but so far, inflation expectations have not become excessively high. Actual inflation was to the high side in September, but that might well look better in the October number that we get on Wednesday, likely the most important data release of the week.

In Europe, bond yields did not follow US yields up. Instead, there was a modest decline in short-term rates, as the result was seen as increasing risks of lower growth in the European economy and hence increasing the probability of ECB rate cuts. As we see it, this risk should not be overstated, at least in the short term. Although European exports to the US could well face higher tariffs from next year, it seems highly unlikely that the tariffs will result in a tightening of US fiscal policy and hence a dampening of global demand and US imports. However, there is in any case increasing concerns over European growth and the risk that inflation could become too low, and we maintain our expectation that the ECB will cut rates by 25bp at every meeting until September, with the possibility that they might chose a 50bp rate cut at the next meeting. One reason is the outlook for fiscal tightening in Europe in 2025. In the coming week, we will get updated forecasts on this and the economy in general from the European Commission.

Further complicating the situation, the German government has collapsed, partly over disagreement about fiscal policy. Markets see an increasing chance that fiscal policy might be eased in the longer term.

The Bank of England delivered a 25bp rate cut this week as expected, but also turned a bit more hawkish as it revised its inflation and growth outlooks substantially higher. Central banks in Norway and Sweden went in opposite directions with a hold in Norway and a 50bp cut in Sweden, see the Scandi Update section.

We did not get the hoped-for concrete numbers for fiscal stimulus in China, other than a statement that it will be “forceful”. However, there was an announcement of a CNY 6tn local government debt swap program which should ease the situation for local governments and make them able to support the economy more. All in all, it remains unclear to what extent policies will be able to turn the situation around for Chinese growth.

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