On Friday, Donald Trump becomes President.
That’s something I never thought I would say. Hopefully, we’ll all still be alive on Monday.
Actually, it would be nice (assuming this isn’t too much to ask) if we’re all still alive in say, a month so we can see how the Trump reflation trade plays out once the bellicose billionaire is officially the leader of the (previously) free world.
This week has been somewhat ironic. It was Trump himself who tanked the Trump trade on Tuesday when the incoming President’s comments in the Journal put the dollar under pressure. Fortunately for those still betting on rising rates and a stronger greenback, Yellen came to the rescue the very next day, sending yields sharply higher in afternoon trading with a speech in San Francisco. “Fed Chair Janet Yellen’s speech on Wednesday confirmed that she agrees with base case of three rate hikes in 2017″, RBC’s Tom Porcelli said in a note out Thursday.
As a reminder, positioning is extreme in Treasurys (like multi-sigma extreme) and long USD is a pretty damn crowded trade as well. It’ll be interesting to see how this shakes out during the new administration’s first couple of weeks in office.
For those interested, here’s some last minute color from the Street prior to the inauguration:
Investors appear to be struggling to reconcile the policies of President-Elect Donald Trump with those of candidate Donald Trump. He has been in the public eye for more than thirty years, but has no history in elected politics. Trump has been a registered Democrat, Independent, and Republican. Add to this his conflicting public statements and we are not surprised that investors are perplexed. Should Trump be taken literally, seriously, or merely symbolically? We think it depends on the issue. There are six issues on which the Trump administration is expected to focus in 2017:
1. Deregulation: Halt new regulations, review existing ones, and repeal those deemed burdensome and harmful to the economy through the use of presidential executive authority, presidential appointees, and the Congressional Review Act (CRA).
2. Immigration and border security: Build a wall on the southern border, deport illegal immigrants, apply “extreme vetting” procedures to immigrants from select countries, and overturn some of President Obama’s immigration-related executive actions.
3. Healthcare reform: Repeal and replace the Affordable Care Act (ACA).
4. Stimulus: Pass a fiscal stimulus package focused on infrastructure. This may be tied to tax reform, namely the repatriation of foreign earnings.
5. Tax reform: Pass tax reform (lower the corporate and individual rates, repatriate foreign earnings, remove deductions, etc).
6. Trade reform (trade agreements, tariffs, and border adjustment): Withdraw from the Trans-Pacific Partnership (TPP). Re-negotiate trade deals, such as the North American Free Trade Agreement (NAFTA), and develop new ones (eg, US-UK bilateral deal, post Article 50). Maintain the option to label China a currency manipulator. Trump and House Republicans want to reform the tax code, with the House GOP focused on destination-based taxation (ie, border adjustment), while Trump continues to refer to a punitive tax (“big border tax”).
Following a highly contested election campaign that invalidated much of the conventional wisdom about the path to the US presidency, Donald Trump will be inaugurated January 20th as the 45th president of the United States at noon local time, 5pm GMT. The ceremony will be followed by a speech that will be carefully decoded by those looking for signs of things to come in the new US administration, an exercise that amounts to political astrology in an era characterized by a shakeup of the old rules of the game. Here we caution that for a number of reasons, market participants accustomed to decoding heavily word-smithed Fed commentary should be wary of applying the same prism to comments from the new administration.
Judging by business confidence data and the momentum evident in the “Trump Trade”, the private sector shows considerable optimism about the capacity of the new US administration to shrink the size of government, cut corporate taxes and pursue de-regulation; in short, swiftly implement the pro-market and pro-business aspects of Trump’s agenda. Indeed, Citi economists are cautiously optimistic about the outlook for the US economy and potential to implement aspects of Trump’s campaign proposals. With a Republican majority in Congress and controlling the Supreme Court, in principle President Trump finds himself in a strong position to move his agenda forward by conventional historical measures.
Meanwhile, the US public, for its part, remains deeply divided–Trump takes office with the lowest approval ratings for an incoming US president in recent history at 41%, compared to 72% in 2008 for President-elect Obama and 62% for George W. Bush. A recent CNN/ORC poll showed that 53% of Americans view Trump unfavorably; other polls suggest his support may be even lower. Unusually, prediction markets are currently pricing in a 50% probability that the new president is impeached before his term finishes. Does any of this matter?
From a political perspective, we think there are some important caveats to bear in mind as well as considerations to help anticipate likely policy developments. Inasmuch as markets famously crave political stability, we caution that political change is by nature disruptive, particularly in this instance, with Trump actively campaigning on reversing many of the policies of his predecessor, the degree of policy distance from the Obama administration, the unlikelihood that his administration will adhere to Republican party orthodoxy, and the pursuit of a wholly new communications strategy. We also note that the geopolitical and security environment that Trump will inherit may offer surprises and possibly tests for the new US leader.