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Donald Trump was inaugurated this week, being officially given the keys to the White House for a second time. So far, there is little sign that distinguishing between posture and policy will be any easier this time around. Nonetheless, the first few days of his administration have provided some additional clarity. Most notably, perhaps, was a more dovish approach to tariffs. Meanwhile, the prominent role of Big Tech CEOs at the inauguration highlighted the likely importance his administration will place on AI, specifically, and economic growth, more broadly. The bigger picture is that the probable outcome of Trump 2.0 remains as before the inauguration: deregulation and an extension of tax cuts, alongside reduced net migration levels and more protectionism. The result will depend on a precise combination of both, but with a boost to demand and a potential reduction in supply, while high nominal GDP growth should be expected.
Among the flurry of executive orders, perhaps most notable was one that was missing: tariffs. The president has since said that he will impose levies amounting to 25% on goods coming from Canada and Mexico, and 10% on those coming from China. However, there is no guarantee that these will come into effect. And the tariffs imposed on Canada and Mexico, in particular, appear likely to be a negotiating tactic. Around 80% of exports in both countries go to the US, leaving them in a weak negotiating position. Our view is that an increase in tariffs is still coming, but will likely take time to be prepared and implemented. The US has less leverage over Europe and so the administration will have to think more carefully about the scale and pace of imposing additional duties. This is something that happened in Trump 1.0. This has resulted in dollar gains being unwound, reminiscent of what happened last time around.
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A notable feature of Mr Trump’s inauguration was the prominence of Big Tech leaders. Five of the ‘Magnificent Seven’s’ CEOs were in attendance, seated notably in front of cabinet picks during the swearing-in ceremony. The share prices of these companies have been on a stellar run, driven by continued earnings growth as well as optimism about the impact of AI. In terms of revenue, almost all of the money dedicated to the latter so far has gone to Nvidia. But the aim is for the other players to roll out products and services that make use of this novel technology. Whether and when they are able to translate their large investment in chips and data centers into earnings will prove critical to the outlook for US equities, and have a large impact on economic growth too. A follow-up presentation at the White House, attended by Sam Altman and others, promised $500 billion in investment to enshrine the US as the world leader in this nascent technology. Whether such sums will be deployed remains to be seen, but a spending spree is more or less guaranteed.
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The president declared an emergency at the southern border and shut down the app that would-be asylum seekers use to book meetings. This already appears to have had a substantial impact on the inflow of people crossing the southern border. The bigger question is the extent to which deportations will take place. There have been conflicting views among administration members, but it seems sensible to pencil in around half a million deportations, which is a rough estimate of the number of undocumented workers in the US with criminal records. However, with more than ten million people thought to be in the country illegally, we cannot rule out a much larger effort to return people to their home country. That would likely put upward pressure on wages in immigration-sensitive sectors, such as agriculture and dining services, while also weighing on demand.
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There was little to announce on fiscal policy, with Congress holding the keys to the purse strings. But with Republicans holding a majority in both houses it seems very likely that there will be an extension to the Tax Cut and Jobs Act, initially implemented in Trump 1.0. It remains unclear whether any such bill would include an election promise to end taxes on tips. It seems probable that there will be changes to corporate tax policy, with a mooted cut for manufacturing firms that produce domestically. Meanwhile, there appears to be growing momentum to reform US tax policy, aiming to ensure that a larger share of the taxes on profits earned by companies headquartered in the US are collected by the IRS, rather than them being diverted to foreign countries. With a large budget deficit and stickier inflation, the Trump administration may have to be more cautious with fiscal policy or run the risk of falling foul of bond investors. The US ten-year government bond yield is around 200bps higher than it was in Trump 1.0, arguably limiting the scope of fiscal stimulus.
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The overall takeaway from the first few days of this administration is uncertainty. Investors cannot be sure still how much of what the president says is a negotiating tactic and how much is a clear policy goal. Tariffs, in particular, remain a big unknown — as does the level of deportations. Fiscal policy is likely to remain highly accommodative given the state of the cycle. That combination of weaker supply amidst higher demand should translate to high nominal GDP growth, with the key question being how much of it will be real and how much will be inflation. However, AI could upend things. There is a clear momentum behind innovation, and US companies have and look set to continue to make substantial investments. The extent to which these translate into increased earnings and productivity remains to be seen. If they are successful, they could be a boom to the US economic outlook, helping to increase supply and contain any inflationary pressures.
The views expressed in this article are the views of the author, not necessarily those of LSEG.
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