Trump Fills Most Economics Posts

For the week ending 27 November 2024

As of midday Wednesday, global equities were higher on the week, with markets taking US President-elect Donald Trump’s tariff threats largely in stride. The yield on the US 10-year Treasury note fell 0.15% from Friday to 4.26%. The price of a barrel of West Texas Intermediate crude oil eased to $69.05 from $70.35 on Friday. Volatility, as measured by futures contracts on the Cboe Volatility Index (VIX), fell to 15.25 from 16.45.

MACRO NEWS

Markets welcome Bessent as Treasury pick

Financial markets reacted favorably to President-elect Donald Trump’s selection of hedge fund manager Scott Bessent to serve as US Secretary of the Treasury. Bessent is seen as a deficit hawk, and the announcement sparked a strong rally in US Treasuries, driving the yield on the 10-year note 14 basis points lower in the hours after the announcement. He has proposed a “3-3-3 plan” to cut the US deficit-to-GDP ratio to 3% by 2028, increase economic growth to 3% and boost domestic energy production by the equivalent of 3 million barrels of oil a day. Bessent, who must be confirmed by the Senate, has called for tariffs to be phased in over time and advocates for maintaining the US dollar’s reserve currency status. The nominee has called for either reducing spending or increasing revenues to lower the cost of extending the 2017 Tax Cuts and Job’s Act, which expires at the end of 2025. Tuesday afternoon it was reported that Trump is considering Kevin Hassett to lead the National Economic Council. Hassett chaired the Council of Economic Advisers in Trump’s first term.

Trump threatens tariff hikes on day one

On Monday evening, Trump took to social media to threaten Mexico and Canada with 25% tariffs by executive order on the first day of his administration. Trump accused Mexico and Canada of facilitating illegal immigration and fentanyl smuggling into the United States. He also threatened additional 10% levies on imports from China for that country’s failure to regulate the chemicals used to make fentanyl. Markets largely took the moves in stride, with equities gaining ground on Tuesday morning and bond yields rising only a few basis points on the assumption that the admonitions are a negotiating tactic. However, both the peso and the Canadian dollar weakened on the news. Mexican President Claudia Sheinbaum wrote in a letter to Trump that Mexico could respond with levies of its own and pointed out that Mexico’s main exports to the US are autos produced by Detroit’s Big Three. Canadian Prime Minister Justin Trudeau spoke with Trump shortly after his social post and vowed to address the incoming administration’s concerns. On Tuesday, Trump nominated Jamieson Greer to the post of US Trade Representative. Greer served as chief of staff to USTR Robert Lighthizer in the first Trump term and is seen as Lighthizer’s protégé and a tariff hawk.

Minutes suggest Fed will move slowly

The minutes of the 7 November meeting of the Federal Open Market Committee showed broad support for gradually moving toward a more neutral stance of monetary policy over time as many officials felt uncertainty over where to place the neutral level of interest rates. On inflation, policymakers noted that the core rate remains somewhat elevated, and while they are confident it is moving sustainably toward 2%, a couple of participants worried that the process could take longer than previously expected. The labor market showed no signs of rapid deterioration, and downside risks to employment and growth have decreased somewhat, they said. Participants also discussed a technical adjustment to lower the rate on reverse repo operations by 5 basis points to match the bottom of the Fed funds target range. The odds of a 0.25% cut at the 18 December meeting stand at about 67%.

QUICK HITS

The US Federal Reserve’s preferred price measure, the personal consumption expenditures price index, rose 2.3% year over year in October, up from 2.1% in September, while the core measure bumped up to 2.8% from 2.7%. Both were in line with expectations. Personal income rose 0.6% in October, doubling economists’ forecasts, while spending rose 0.4%.

The second release of US Q3 GDP was unrevised at 2.8%, though personal consumption was revised down modestly to a gain of 3.5% annualized from the quarter before, down from an initial 3.7% reading.

The Russell 2000^_® index of small-cap stocks closed at a record high 2,442 on Monday, having gained about 8% since Election Day in the US. The rise took place in anticipation of lower taxes and a lighter regulatory burden. Given their more domestic revenue bases, small caps tend to be less exposed to headwinds caused by tariffs than large caps.

Trump is said to be mulling the appointment of a White House artificial intelligence czar to coordinate federal policy and the government’s use of the technology.

New home sales in the US tumbled 17.3% in October.

On Tuesday, the spread between France’s 10-year government bond and its German counterpart widened to 86 basis points, the most since the European sovereign debt crisis in 2012. The fragile French government led by Prime Minister Michel Barnier is struggling to pass next year’s budget in the face of a fragmented French parliament.

On Tuesday, US President Joe Biden proposed expanding Medicare and Medicaid coverage of anti-obesity drugs. The program would be effective starting in 2026 if the incoming Trump administration backs the move.

A ceasefire between Israel and Hezbollah was approved by the Israeli security cabinet Tuesday evening, but Israeli Prime Minister Benjamin Netanyahu said if the terrorist group rearms, Israel will respond. The prime minister said a truce will isolate Hamas and hasten the return of hostages while a ceasefire will allow Israel to focus on Iran. He added that Israel is determined to prevent Iran from acquiring nuclear arms.

German industrial giants Bosch and ThyssenKrupp this week announced thousands of job cuts over the next several years. The companies cited overcapacity in the auto and steel industries, respectively.

Trump nominated pro-union Representative Lori Chavez-DeRemer (R-OR) as his Secretary of Labor.

Bloomberg reported this week that the US trade deficit with China is expected to hit a record this year as customers front-load orders in light of potential tariff hikes in 2025.

Chancellor of the Exchequer Rachel Reeves told the Confederation of British Industry this week that firms will face no further tax hikes beyond the ones contained in the government’s late-October budget. Employers’ contributions to national insurance were raised in the budget, precipitating a backlash from the business community.

The Reserve Bank of New Zealand cut its overnight cash rate by 0.50% to 4.25% on Wednesday and suggested a similar cut is likely in February.

THE WEEK AHEAD

Monday: Manufacturing PMIs released globally

Wednesday: Services and composite PMIs released globally, Australian GDP, eurozone PPI, US durable goods orders

Thursday: Eurozone retail sales

Friday: US nonfarm payrolls, eurozone GDP