Donald Trump's unexpected presidential win has rallied stocks and routed bonds, especially Treasuries, but how long those moves and sentiments last will depend on what Trump actually does once he takes office. Already stocks have retreated slightly from recent market highs and bonds have moved off recent lows.
"Markets are going through a big Trump rethink," said Carl Weinberg, chief economist at High Frequency Economics and co-host of a webinar on its implications for the U.S. and Global Economy. Markets are hoping Trump will be practical and market friendly but don't really know yet if that will be the case, according to Weinberg. "We have a lot of questions, not a lot of answers."
Trump offered policy pledges during the campaign and recently released a plan for his first 100 days, but Weinberg advised, "Don't take his campaign rhetoric and specific proposals too literally."
He and Jim O'Sullivan, HFE's chief U.S. economist, discussed several key items on the Trump policy agenda, however, that investors should be watching now because of their potential impact on the U.S. economy and financial markets.
Trade Policy
"Trump has the ability to start a trade war" and that threat "is hanging over markets," said O'Sullivan. His first 100 days plan includes a pledge to renegotiate or withdraw from NAFTA, establish tariffs to discourage companies from relocating to other countries and laying off workers in the U.S. and label China a currency manipulator.
"Trade is where the mischief can occur most easily," said Weinberg. "The president has a lot of discretion over tariffs and treaties but the reality is that Trump may not be able to do a lot." During the campaign Trump threatened 45% tariffs on Chinese imports and 35% on imports from Mexico.
"Anything aimed at Mexico could spill over to other countries, particularly Canada," said Weinberg. If such policies are realized, they will ultimately spill over into the U.S. in the form of higher prices for consumers, according to Weinberg.
He explained that since American car parts are imported from Mexico, Canada and Asia, tariffs on those imports would raise the price of many American cars. "If tariffs affect the flow from Canada then you are impacting the price of every Chrysler assembled in the U.S.," said Weinberg.
Ford Motor Co.'s CEO Mark Fields on Tuesday, said a 35% tariff on imports from Mexico, where Ford also manufactures cars, "would have a huge impact on the U.S. economy."
Given those consequences Trump might just use the threat of tariffs to renegotiate trade pacts such as NAFTA in favor of the U.S., according to Weinberg.
Weinberg expects Trump will have difficulty declaring China a currency manipulator because the yuan has been appreciating and People's Bank of China has been intervening in markets to prevent a big drop in the currency. Ironically, since Trump's election the yuan has fallen sharply to an eight-year low against the dollar due to his rhetoric.
Oil
Trump's policies for the oil market, like his policies for trade, could also have mixed results. Trump plans to lift the restrictions on the production of $50 trillion dollars' worth of American energy reserves, including shale, oil, natural gas and clean coal.
