Εβδομαδιαία Επισκόπηση: Διεθνής Οικονομία & Αγορές, 20/01/25
Policy signals from the Trump Administration and the evolution of Q4:2024 earnings season will shape investors’ risk appetite in the short term
The main message from President Trump’s inauguration speech on 20th January was “putting America first”. His memorandum on trade policy instructs the US Trade Representative, among other agencies, to undertake several reviews of general trade, sectoral-trade, investment and export agreements and to report to him by April 1st in order to address unfair and unbalanced trade practices.
President Trump commented that might impose a 25% tariff on imports from Mexico and Canada starting February 1st and might still implement universal tariffs, refraining from giving specific guidelines vis-à-vis China. At the same time, the new Administration will put significant resources towards border enforcement to restrict immigration flows and plans to increase deportations from the interior.
President Trump signed orders to withdraw from the OECD Global Tax Deal, the Paris Climate Accord and the World Health Organization. Importantly, the Administration puts forward a National Energy Strategy to (i) use its unrealized energy capacity domestically, inter alia, tapping Alaska’s abundant supply of natural resources, in order to bring down costs and prices for households and corporates and (ii) to sell to international allies (i.e. EU) a reliable and diversified supply of energy (oil and gas).
President Trump provided little detail on fiscal policy, albeit the extension of 2017 tax cuts that expire at the end of 2025 are very likely. According to the US Congressional Budget Office (January 17th), under current law, the federal budget deficit is expected to narrow from -6.6% of GDP in fiscal year 2024 to -6.2% in 2025 and to -5.5% in 2026. The deficit will remain wide relative to history and given the forecasted unemployment rate of 4.4% (neutral rate of 4% to 4.2% based on FOMC). Net interest payments are expected to increase slightly to 3.2% as percent of GDP in FY2026 from 3.1% in FY2024.
Uncertainty regarding the prospective Trump policies and their impact on the (global) economy will continue, at least in the first quarter of the year. Note that the IMF (January 17th) raised its forecast for US GDP growth by 0.5 pp to +2.7% in 2025 compared with the projections of October 2024 due to the strong “carry-over” effect from 2024, robust labor market (unemployment rate: 4.1%) and accelerating investment.
The IMF also raised marginally the forecast for China’s real GDP growth in 2025 by 0.1 pps to 4.6%. Stronger-than-expected activity (real GDP grew by +5.4% yoy in Q4:2024 compared with expectations of +5.0% yoy) and the policy support measures that were announced in November are expected to offset the ongoing property market drag and heightened trade policy uncertainty.
The largest financial institutions, including JP Morgan and Goldman Sachs, reported better-than-expected earnings in the past week, with the S&P500 Financials Index increasing by +6.1% wow. Financials recorded strong gains in the euro area as well (SX7E: +4.2% wow), with the FTSE/Athens Bank index rising to the highest level since 2015.
Government bond yields retreated, particularly in the US and the UK, following softer-than-expected inflation outcomes in December. Having said that, with core inflation demonstrating some stickiness lately, the Fed could be cautious with interest rate cuts in the short-term.
The main message from President Trump’s inauguration speech on 20th January was “putting America first”. His memorandum on trade policy instructs the US Trade Representative, among other agencies, to undertake several reviews of general trade, sectoral-trade, investment and export agreements and to report to him by April 1st in order to address unfair and unbalanced trade practices.
President Trump commented that might impose a 25% tariff on imports from Mexico and Canada starting February 1st and might still implement universal tariffs, refraining from giving specific guidelines vis-à-vis China. At the same time, the new Administration will put significant resources towards border enforcement to restrict immigration flows and plans to increase deportations from the interior.
President Trump signed orders to withdraw from the OECD Global Tax Deal, the Paris Climate Accord and the World Health Organization. Importantly, the Administration puts forward a National Energy Strategy to (i) use its unrealized energy capacity domestically, inter alia, tapping Alaska’s abundant supply of natural resources, in order to bring down costs and prices for households and corporates and (ii) to sell to international allies (i.e. EU) a reliable and diversified supply of energy (oil and gas).
President Trump provided little detail on fiscal policy, albeit the extension of 2017 tax cuts that expire at the end of 2025 are very likely. According to the US Congressional Budget Office (January 17th), under current law, the federal budget deficit is expected to narrow from -6.6% of GDP in fiscal year 2024 to -6.2% in 2025 and to -5.5% in 2026. The deficit will remain wide relative to history and given the forecasted unemployment rate of 4.4% (neutral rate of 4% to 4.2% based on FOMC). Net interest payments are expected to increase slightly to 3.2% as percent of GDP in FY2026 from 3.1% in FY2024.
Uncertainty regarding the prospective Trump policies and their impact on the (global) economy will continue, at least in the first quarter of the year. Note that the IMF (January 17th) raised its forecast for US GDP growth by 0.5 pp to +2.7% in 2025 compared with the projections of October 2024 due to the strong “carry-over” effect from 2024, robust labor market (unemployment rate: 4.1%) and accelerating investment.
The IMF also raised marginally the forecast for China’s real GDP growth in 2025 by 0.1 pps to 4.6%. Stronger-than-expected activity (real GDP grew by +5.4% yoy in Q4:2024 compared with expectations of +5.0% yoy) and the policy support measures that were announced in November are expected to offset the ongoing property market drag and heightened trade policy uncertainty.
The largest financial institutions, including JP Morgan and Goldman Sachs, reported better-than-expected earnings in the past week, with the S&P500 Financials Index increasing by +6.1% wow. Financials recorded strong gains in the euro area as well (SX7E: +4.2% wow), with the FTSE/Athens Bank index rising to the highest level since 2015.
Government bond yields retreated, particularly in the US and the UK, following softer-than-expected inflation outcomes in December. Having said that, with core inflation demonstrating some stickiness lately, the Fed could be cautious with interest rate cuts in the short-term.