Unsurprisingly the focus this week has been firmly on the US, with the inauguration of Donald Trump as the 47th President of the United States.
Trump is the first President since Grover Cleveland in 1885 to serve non-consecutive terms, the oldest President ever to be sworn in (age 78, eclipsing Joe Biden), and the first ever convicted felon to become President.
Trump’s inauguration speech on Monday delivered no major surprises and financial markets were boosted by the lack of immediate news on tariffs. Trump said, “I was saved by God to make America great again” and promised a new “golden age of America”. He declared himself a “peacemaker” promising to “bring peace to the world” and ending wars in the Middle East and Ukraine. His messaging on reoccupying the Panama Canal and “expanding America’s territory” somewhat contradicted this peaceful message. As expected, Trump signed a raft of executive orders in his first 24 hours in office, across immigration, removing green energy incentives and promoting the oil and gas sector. Trump also withdrew the US from the World Health Organisation and the Paris Climate Accord.
The market relief over an immediate lack of news on tariffs was tempered later on Monday as Trump renewed a threat of 25% tariffs on Mexico and Canada, to be implemented as soon as the start of next month, blaming the flow of drugs and undocumented migrants from both countries as justification. Trump did offer Canada an exemption from tariffs if they chose to “become a state” of the US. Trump also raised the prospect of a 10% additional tariff on China next month “based on the fact they’re sending fentanyl to Mexico and Canada” and on Europe, Trump said “We have a $350 billion deficit with the European Union. They treat us very, very badly, so they’re going to be in for tariffs.” We know from Trump’s first term in office that tariffs will be used as a negotiation tool, so the language this week comes as no surprise. All the same, financial markets appear to have taken the view that Trump’s ‘bark will be worse than his bite’, so to speak, and that some of the more aggressive levels of tariffs touted will not come to fruition. There will never be a point of complete certainty as Trump’s first term in office showed a continual return to the theme of tariffs but if the dates mentioned by Trump are to be believed, we could see some concrete news on the first wave of tariffs reasonably swiftly, at least as far as Mexico and Canada are concerned. Of course, tariffs can work in both directions, and as I mentioned at the start of the year, other countries will have to choose to negotiate, retaliate or mitigate tariffs as they see fit. Outgoing Canadian Prime Minister Justin Trudeau talked up the prospects for retaliation, saying “I support the principle of dollar for dollar matching tariffs”.
In the UK, the update to the employment data saw with stronger wage growth despite rising unemployment. The unemployment rate climbed to 4.4%, above expectations, while payrolls fell by 11,000 in the three months to November and by 47,000 in the three months to December, with a total of 30.3 million people in the payrolled workforce. Wages climbed however, with average weekly earnings up 5.6% year on year to November, accelerating from 5.2% previously. Markets focussed more on the weakening employment data rather than the wage numbers, with expectations increasing the Bank of England will cut rates next month. Markets are now pricing a probability of over 90% that interest rates will be cut by 25 basis points when the Monetary Policy Committee meets on 6 February.
The Bank of Japan, in their meeting today, raised interest rates by 25 basis points to 0.5% in a move that was fully expected, taking rates to their highest level in 17 years. The Bank further upgraded their inflation forecasts and said that “because real interest rates remained at very low levels”, if economic activity and price increases achieved the levels forecast in its outlook, it “would continue to raise the policy rate”. Data released today showed headline CPI was 3.6% compared and 3.2% previously.
In their updated global growth outlook, the International Monetary Fund forecast growth of 3.3% in 2025 as they see an end to the “post pandemic cycle” and a return to potential growth levels that remain “substantially weakened”. While their growth outlook was largely unchanged, the IMF highlighted that divergences between countries are widening as they increased their growth forecast for the US from 2.2% to 2.7% but cut their forecast for the eurozone from 1% to 0.8%. The IMF highlighted the ongoing burden of higher energy prices on Europe, with gas prices five times as high as in the USA, compared to twice as high before the pandemic. They expect economic policy uncertainty to remain elevated thanks to the many new governments elected during 2024 implementing policies and warned against tariffs saying they are “unlikely to ameliorate external imbalances and may instead hurt trading partners, spur retaliation, and leave every country worse off”.
In the aftermath of President Trump’s first few days in office, the consensus view in markets still appears to be that the President will take his time to implement tariffs, despite his rhetoric over February deadlines. The fact that trade agreements with Mexico, Canada and China have been placed “under review” has given the impression that additional tariffs may take months to be implemented. Trump also said that the US is “not ready” for universal tariffs on anyone trading with the US. Investors will need to rapidly adjust to a period of near-overwhelming news flow and soundbites from President Trump and try to separate actual policy intentions from rhetoric. As Mexican President Claudia Sheinbaum said this week, “it’s always important to have a cool head and refer to the decrees rather than the discourse”.
Source: Columbia Threadneedle Investments as at 24 January 2025.
