Rob Hogg: Market and macro impact of President Trump’s re-election

Donald Trump re-election   |   Global Bond yields   |  Europe   |   Australia   |   Outlook

 

Market reaction to the re-election of US President Trump was the key theme in November

While President Trump’s potential victory had begun to be priced by markets during October, the swifter than expected announcement of his re-election (and the Republican “clean sweep”) caused further sharp moves in global markets in early November and gave a sense of investors’ expectations about the likely impact of his mooted policies.

The re-election of President Trump with his “Make America Great Again” election slogan was taken positively by the US dollar and US share markets which moved higher over the month, particularly smaller cap stocks. However, equity markets in other regions were softer over the month with a number of continental European and Asian markets ending the month lower – probably negatively impacted by concerns about the potential impact of mooted tariffs.

US bond yields moved higher immediately following the election but, after this initial increase, yields then retreated and the US 10-year bond yield actually ended the month 0.115% lower at 4.17%. A similar pattern was observed in the Australian bond market over the month with the 10-year yield ending 0.165% lower at 4.34% after peaking mid-month at around 4.70%.

In this monthly update, we look at:

• The market and macro impact of President Trump’s re-election
• How global bond yields followed the evolution of growth and inflation expectations up, and then down during the month
• French bond yields which are indicating a loss of investor confidence in French budgetary policy
• Australian employment and inflation data which caused expectations for rate cuts to be revised again to an even flatter and later rate cutting profile
• Themes from the Annual General Meeting season and November equity sector performances

 

As we’ve been noting in recent monthlies, we remain optimistic but cautious about the equity market outlook and, while we expect a modest consolidation of recent equity market moves, at this stage the macroeconomic catalysts for a significant equity market selloff do not appear to be present.

However, given the not insignificant re-rating of Australian and global stock markets during the year (as measured by higher price/earnings multiples), equity markets are likely to be particularly sensitive to changes in  market interest rates (bond yields).

Although bond yields ended November slightly lower compared with end-October, if yields were to again begin their march higher (as occurred in October), the relatively high valuations currently exhibited in many global equity markets would be under threat.

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| United States

Market and macro impact of President Trump’s re-election

As noted above, the end of election uncertainty and an early and clear US election outcome drove a strong US equity market rally supported by hopes of tax cuts and deregulation.

US small and mid-cap stocks performed best. However, other global equity markets performed poorly. European equities lagged in particular, accompanied by a weaker Euro currency exchange rate and a sharp decline in continental European bond yields (as increased official interest rate cuts and weaker growth were priced-in).

In general, markets moved to price-in the key elements of Trump’s mooted policies with the Republican “sweep” likely to lead to modest fiscal expansion (tax cuts), increased tariffs (mainly on China), and lower net immigration levels.

However, while a sweep of the Congress suggests the high likelihood of significant policy change, there are limits and constraints on what the new administration can practically do:

• Mid-term congressional elections are due in two years and congressional majorities could be lost at that point if policy changes are unpopular.
• The Republican majority in the House is relatively slim and, with representatives not as closely tied to voting on party lines in the US, legislation is not guaranteed of passage even with a “majority” of seats.
• The bond market will also an arbiter of Trump Administration policy with any non-market friendly policy change (e.g. inflationary policies) potentially at risk of causing a sell-off in bond prices (higher yields).

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| Global Bonds

Global bond yields follow the evolution of growth and inflation expectations – hint of slower US growth momentum

As noted above, after rising sharply through October largely in anticipation of Trump’s election victory and his growth-stimulating policies, US bond yields moved even higher in the immediate aftermath of his victory but then trailed lower toward the end of the month.

This late month trend lower was likely partly a reaction to the very significant increase in yields that had already occurred in October but also influenced by the hint of a slight loss of growth momentum in US data releases toward the end of the month.

The chart below from the Federal Reserve Bank of Atlanta shows their “GDP-Now” measure which estimates momentum in growth on a daily basis by tracking economic releases and determining what pace of growth they imply.

The chart shows that there was a downward change in momentum in estimates for December quarter US GDP in the last week of November (green line), consistent with the pattern we have seen in movements in bond yields during November.

Evolution of the estimate of December quarter growth (GDP) – Atlanta Fed’s “GDP-Now”

Quarterly percent change (SAAR)

 

Seemingly moving in lock-step with the suggestion of slowing growth momentum, the chart below shows the path of US and Australian 10-year yields over the past two months. Here the rise in yields ahead and immediately after the election can be seen, followed by a tailing-off toward the end of November.

US and Australian 10-year bond yields (September 30 to November 29)

 

Moving similarly to the pattern exhibited by both US bond yields and the GDP-Now estimate, expectations for the future US official cash rate also evolved through the month.

The chart below shows the expected future path of the US Federal Funds Rate – the blue line shows expectations as at the end of October and the black line shows an expected higher profile (i.e.: fewer rate cuts) as at the end of November.

Together these charts indicate that interest rate markets are highly sensitive to movements in the perceived momentum of the economy and that this perceived momentum accelerated through October and early November but has dissipated since.

US implied future Federal Funds Rate

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| Europe

French bond yields indicating a loss of investor confidence in French budgetary policy

Having started 2024 at around 2.6%, French 10-year bond yields have moved up to around 3% in recent weeks with the spread premium that France needs to offer on its government bonds (compared to those offered by the German government) now around 0.9%, the widest since the volatility witnessed during the decade-ago Eurozone debt crisis.

But it is not just compared with the German government that the French government’s perceived creditworthiness has deteriorated, Greek 10-year bonds have outperformed and are now trading at a near-identical yield to their French equivalent implying a similar degree of investor confidence in the budgetary policies and general macro-economic settings of both governments.

This convergence in pricing reflects both a deterioration in investor confidence in France (due largely to ongoing political uncertainty following the snap election announcement in June), but also an improvement in confidence in Greek sovereign bonds following the Greek government’s announced intention to repay emergency funding (received years ago) earlier than scheduled.

Greek and French 10-year government bond yields

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| Australia

Australian employment and inflation data causes expectations for rate cuts to be revised to a flatter and later profile.

Australian employment data remains robust, and the latest monthly inflation data revealed that underlying inflation remains elevated above the RBA’s 2% to 3% band.

Together these two data releases caused rate cut expectations in Australia to be moved further out, with the first cut now anticipated in May (previously February).There are now expected to be fewer cuts also.

It is the profile of inflation that is having the most impact on expected rate cut timing, in particular the “stickiness” of underlying inflation measures such as the “Trimmed Mean”.

The trimmed mean is designed to give a better guide of underlying inflation momentum. The trimmed mean is calculated using a weighted average of percentage change in the prices of goods and services in the middle 70% per cent of the survey – i.e.: it excludes the largest 15% of price changes at both ends of the price change spectrum over the period in question.

In October the annual rate of increase in the trimmed mean actually accelerated to 3.5% from 3.2% in September, moving clearly in the opposite direction to that required by the RBA to contemplate cutting rates.

Australian monthly inflation (October 2024)

Percentage change %

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Themes from the Annual General Meeting (AGM) season

Company commentary from recent trading updates and AGMs has highlighted key trends including slowing sales momentum, rising costs, and margin pressure – particularly within travel and consumer discretionary sectors.

Against this deteriorating background, according to analysis by JP Morgan fund managers appear to have already taken a cautious stance by moving to overweight positioning in defensive sectors (that are less sensitive to the economy’s path), matched by moving to underweight positioning in cyclical sectors (which are more sensitive to the economy).

JP Morgan’s sector positioning survey of fund managers

 

Together, these “underlying” and “breadth” measures of the CPI suggest that inflation pressures are continuing to ease but are still not quite at a level that the RBA feels able to match with a rate cut. But this point is likely only a few months away and could occur this year.

Within the market in November, Technology was the best performing sector (following earnings upgrades by Technology One and Xero) while banks continued their strong calendar 2024 performances with the sector enjoying earnings upgrades after bank reporting season, but with further P/E expansion also boosting returns.

Resources were the worst performer and have now given up nearly all the gains achieved after Chinese authorities announced stimulus measures a few months ago as subsequent updates have been underwhelming.

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Read Rob’s previous macro updates  |   Watch Rob Hogg’s most recent video update  |   Back to the top of the page

 

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