13 Feb 2024 | 5 minutes to read
The US election is due to take place on Bonfire Night this year, but will it provide fireworks? Today, it looks as though President Biden will be challenged by former-President Trump, with Trump currently marginally ahead in the polls, despite the fact that Biden defeated Trump in the last election. This makes the prospect of a second Trump term something investors need to take seriously.
What are the implications for investors? Concrete policy is thin on the ground at this stage but some ideas have been floated. Trump has already suggested expanding protectionist policies, levying a 10% tariff on all imports and in excess of 60% on China imports. The impact of this will vary greatly across goods but, for some sectors, this may accelerate on-shoring.
Another key trend is deregulation. Trump is expected to go further with bank deregulation, which investors see as positive for financial stocks, and to relax energy regulation. However, this is not necessarily good news for all energy stocks. Making energy exploration and extraction easier in the US could increase output, which may not be positive for energy prices.
A third key area is healthcare, where a Trump presidency is expected to be less supportive for spending.
Perhaps the most important impact of a second Trump term would be geopolitical. While the incumbent administration is already taking a hawkish stance on China, the prospect of a noisy and disorderly spat with Beijing reasserts itself. Similarly, Trump’s response to Russia’s war in Ukraine is unknown, with Europe likely to be put in an uncomfortable position.
While November is some time away and Trump’s legal troubles may impact his approval rating, it seems likely that Trump’s policies, when he announces them, will be taken seriously by the market.
As China enters the year of the dragon, is the economy finding its fire?
Last week monetary easing came into effect, with a cut to the Reserve Requirement Ratio, the rules governing the amount of capital banks must hold as reserves. This aims to free up capital for banks to lend to businesses, and is expected to inject c. RMB 1trn (c. $140bn) into the economy. While policymakers have been trying to ease monetary conditions to support growth, there is a limit to how far interest rates can be cut without risking financial instability, as bank net interest margins become compressed when rates are low.
In the last six months, easing measures have broadly disappointed market participants, but January’s money and credit data showed some revival. Total Social Financing continued to grow at 10%, while new bank loans were stronger-than-expected, rising to c. RMB5trn from RMB1trn. However, money supply data was a disappointment. M1 growth accelerated to 5.9% from 1.3% in December, though this was flattered by the later date of the Lunar New Year. M2, broader money, actually decelerated to 8.7% from 9.7%. This is important at the moment, because China’s rate of inflation has been at or below zero since last summer.
Looking ahead, we expect further easing to be announced, but not enough to turbo-charge China out of the current growth slump. Consensus expects growth to be around 4.5% this year, well below pre-pandemic levels. This is likely to have an impact on global activity elsewhere.
With investors questioning when the Bank of England will cut rates, and how far, this week’s labour market data has been a key data point. At the February meeting of the Bank of England’s Monetary Policy Committee (MPC), members softened guidance, with only two votes for a rate hike, six for no change and one for a cut. Members also expressed greater confidence that the labour market is easing, confirming that “the restrictive stance of monetary policy was weighing on activity and was leading to a looser labour market”.
Today’s data confirms that some aspects of the labour market are slowing, with regular pay growth slowing to 6.2% from 6.6%, and a drop in vacancies for the 19th month in a row. The new Labour Force Survey data (which has been on hiatus in recent months) also showed a slowing in hiring in December. However, participation declined by 15,000, resulting in a modest fall in the unemployment rate to 3.8% from 3.9%, as opposed to the expected rise.
What does this mean for the MPC? While evidence of slowing wages is encouraging, the labour market is still clearly resilient, strengthening the case for rates cuts only later in the year.
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