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The financial market reaction post-Trump’s win in the US presidential election has been at odds with what was anticipated by many prior to the result. The reaction to date may be too optimistic on the reflation trade, indeed there remains much uncertainty about what a Trump presidency can deliver. Markets also appear to be discounting the geopolitical risks from a Trump presidency.
Further, capital flows continue to exit EM, accelerating post-Trump’s presidential victory. The US CPI is expected to rise sharply again in October amid higher energy prices. Core pressures are set to remain modest. Fed Chair Yellen testifies to Congress on Thursday and it is expected that she will reinforce the view that December is very live for a rate hike, ANZ reported.
Trump’s policy fiscal proposals at face value seem highly stimulatory: he wants to spend up big on infrastructure. The President needs Congress’ support for appropriation and revenue bills. However, on trade the President has considerable unilateral power.
Further, for households, Trump has proposed cutting the seven marginal tax rates to just three, 33, 25 and 12 percent. He also wants to slash the corporate tax rate to 15 percent from 35 percent. Also, under the new personal income tax thresholds, high-income taxpayers would receive the biggest cuts, both in dollar terms and as a percentage of income.
Trump also intends to label China a currency manipulator as a possible precursor to implementing tariffs. Also, he has plans to withdraw membership from the Trans-Pacific Partnership (TPP) agreement. This action could actually reduce the US’s global bargaining power, harm his other trade goals, and ultimately dampen US growth.
"As we look into 2017 and 2018, a number of Trump’s proposals appear inflationary (stimulatory fiscal policy and tariffs) which suggests the Fed may need to tighten a lot more aggressively than is currently priced by the market and by us," ANZ commented in the report.
