The Two Weeks That Will Be (19th January 2025)
1. Trump
The next two weeks are all about one man and one man alone. Make sure you’ve downloaded Truth Social because that’s how US government is going to be done from now on. Even Mel Gibson didn’t know he had been made a special envoy to Hollywood until he was sent the tweeted announcement. Whatever a special envoy is.
This kind of shoot-from-the-hip, making-up-jobs freewheeling has engendered a sense of nervousness about his imminent arrival. Perhaps he doesn’t really mean it about tariffs? Is it just another marketing campaign? He did just launch his own cryptocurrency after all. That’s not what presidents do, is it?
It’s what this President does. If you think like Donald J Trump, it all makes perfect sense. There is no place where politics starts and marketing ends. It’s all The Art of The Deal. Politicians and investors often fail to understand one another: What sells politically isn’t always what works financially, as Rachel Reeves is currently finding out to her cost. But in Trump we have someone who speaks both languages. You personally might not like the words that come out but it has taken him to an unprecedented second non-consecutive term on a majority of the popular vote with control of all branches of government. So, he is going to proceed as he set out.
This means there will definitely be tariffs. In line with the 20th amendment of the US Constitution, at one microsecond after 12noon EST on Monday 20th January, the new President takes power. Expect an immediate raft of executive orders. Trump has had years to get his ducks in a row; he’s been in the position of president-elect before; and he wants to get on with his agenda. The one big difference between DJT v2.0 and the first iteration is that he will be 82 by the end of his term in office. He wants to go harder and faster. The next two weeks will be a flurry of activity. Tariffs, deportations, tax cuts, peace in Ukraine, peace in the middle east, threaten war somewhere… it will all be happening.
This is how he has always worked. Just look at the opening paragraphs of The Art of The Deal:
Trump then lists calls with a politician, a radio show host, the commissioner of the US Football League, the owners of Broadway theatres, and a construction project manager. Then he stops for lunch: a can of tomato juice.
No doubt this isn’t exactly what happened on the day in question but you get the idea. Substitute that list from 1987 for the President of Russia, a FOX News anchor, Pam Bondi and Elon Musk and Trump is now just living the same life he always did. Except this time he’s US President. Again.
So it’s not a question of what tariffs and when, but tariffs, now, for anyone who doesn’t help America. And then more later if you still won’t work with Donald. Tariffs are the weapon he always carries with him, ready to be deployed for almost anything at any time. The question is not what he will do with them, but what the other players in the game will do in response.
The markets appear to have swallowed the heuristic that tariffs are bad because they’re inflationary, thus raising interest rates and harming stock markets. There are a great many steps in that logic which would collapse under examination but given it exists, we are compelled to admit that Trump would not want to do anything that hurt the market. But tariffs don’t exist in a vacuum. Crypto deregulation, deportations, tax cuts and a foreign policy peace divided could – and in Trump’s mind will – lead to capital flooding into a MAGA-growth America.
2. The Fed
If interest rates are the problem, Trump can use the power of patronage to weigh on the members of the Federal Reserve. The Fed Vice Chair for Supervision, Michael Barr, has already decided to step down early from that role, although he remains a Fed Governor. And we know Powell has form on incurring Trumpian ire.
The other key difference between Trump 1 and 2 is the level of interest rates. The Fed had just raised rates by 25bp to take them up to the heady heights of 0.75% when Trump was last inaugurated. They were gradually raised to 2.5% during his term in office. This time round, even though the Fed have been cutting, rates are significantly higher. Of particular concern to the market has been the rise in the 10 year yield, now almost double the levels of inauguration day eight years ago. But the S&P500 is almost two and a half times higher than it was back then. Trump will be expecting a similarly sensational rally with the MAG7 giving way to the MAG493 as the rest of the US stock market catches up.
In the meantime, it is politically beneficial for the Fed to be patient. If inflation does indeed re-accelerate, the market will do some of its tightening for them. They can pivot back to hawkishness if Trump takes the flak first. Some FOMC members might even prefer to allow the bond vigilantes to take the initiative, curbing the Trumpian tendency towards debt/deficit expansionary policy before it gets out of hand. After all, it’s not just interest rates and inflation that are higher than 2017 – the US national debt is $35 trillion rather than $20trn.
It is also economically beneficial for the Fed to wait. In 2018, Fed economist Chris Erceg released a paper “The Macroeconomic Effects of Trade Policy” which modelled the impact of tariffs. The slide below shows that it depends whether tariffs are applied broadly or only targeted on intermediate goods:
The simulation showed that tariffs on investment goods are deflationary and lead to a lower policy rate. And so we can expect Powell to deliver a balanced, steady-as-she-goes press conference after the FOMC meeting concludes on Wednesday 29th January.
3. The BOJ
The reverse will be true for the Bank of Japan. They will hike rates on Friday, absent a huge surge in market volatility such as that which accompanied their last hike in the summer. No less than five sources told Reuters as much. Ueda has been itching to pull the trigger and now he gets his chance.
4. The ECB
The ECB will cut rates on Thursday 30th January. They have to. At some stage the bond vigilantes will turn from the lack of a credible plan from the UK government to the lack of any government at all in the two core Eurozone economies. The ECB will not want to bail out fiscal profligacy but they have a narrow window to try and boost growth during a period of huge political uncertainty.
5. Davos
The only relevant highlight on the Davos calendar is therefore the speech by Von Der Leyen on Tuesday, given she’s the most senior elected official in Europe.
The rest of Davos shows how far the event has fallen. There is only one panel on debt which turns out to be about emerging markets. Even Donald Trump is only appearing in a fly-by, virtual speech on Thursday. Speakers such as Mel B and David Beckham clearly didn’t warrant anything further. Tony Blair merely pops up on a panel alongside the Minister of Digital Economy of Togo.
6. Earnings
In the midst of all the potential volatility as the market adjusts to the new Trump normal, we get into the heart of earnings season. Microsoft, Meta and Tesla report on Wednesday 29th January and Apple and Visa on Thursday 30th January.
