René Defossez, Research Analyst at Natixis, suggests that for investors, the programme of Donald Trump is expected to lead to a deterioration in the fiscal situation and to drive up inflation, but at the same time it is expected to stimulate growth.
“Hence, it will encourage the Federal Reserve to tighten its monetary policy more rapidly. That, at any rate, is what can be made of the markets’ initial reaction to the election of Donald Trump.”
“This election triggered a 30bp rise in the 10-year TNote yield, which can be analysed as follows: a 13bp rise in the real rate and a 17bp rise in the inflation premium. Concurrently, the S&P 500 put on 3.5%. Finally, the DXY dollar index rebounded to 99.09, its highest level since the start of the year.”
“The market’s optimism as regards growth stems from the infrastructure programme announced by Donald Trump, which on paper is considerable at $1,000bn, and the prospect of tax cuts, notably for companies (in his “Contract with the American Voter”, Donald Trump pledged to cut the corporate tax rate from 35% to 15%). In the financial sector, it is the promise to repeal Dodd-Frank Act that is saluted, as this would free resources to fund the economy.”
“The nature of the policy mix is set to change: fiscal policy can be expected to be more generous (even though the funding of the pro-growth measures remains a mystery), while monetary policy will turn more restrictive. The probability of a December hike in the Fed Funds rate now towers on high (84% according to the FF futures).”
“It is obviously far too early to know precisely what the economic policy of the new administration will be, hence what impact it will have on the financial markets.”
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