High inflation will return in US if Trump follows through on tariff, deportation promises

THE US stock market soared and the Treasury market slumped on Wednesday (Nov 6) – the first day after the presidential election – as traders anticipated that the second Donald Trump administration would be even more pro-business than the first, with expectations of lower taxes, a greater protection of US industry and deregulation on all fronts.

The Treasury market often acts as the stock market’s older and more sober brother, and the same lavish handouts to industry and taxpayers that the stock market was celebrating caused bond investors to fret about how Trump’s administration was going to pay for it all.

Several categories of stocks were particularly strong. There were the oil producers, such as Exxon Mobil, who will benefit from a likely rollback of environmental regulations.

Then there was what Bloomberg News dubbed the “America First” trade. Domestic manufacturers such as Caterpillar and General Motors were big winners in the initial phase of protectionism, but they may eventually be hurt should China and the European Union respond to tariff threats by engaging in a trade war.

Shares of Caterpillar rose nearly 9 per cent at the end of trading on Wednesday, while the domestically focused Russell 2000 index of small caps rose almost 6 per cent.

Private prison operators in the US will likely benefit from Trump’s vow to seize more people at the Mexican border and put them in detention centres. Geo Group’s stock rose by more than 40 per cent. Some of the targets of the US Federal Trade Comission, the most robust antitrust agency in the US for decades, rallied in anticipation.

Of the companies whose deals the commission blocked in recent years, shares of Medicaid and Medicare administrator Humana soared, as did credit-card companies Discover Financial and Capital One.

“To take your foot off the throat is easier than to shift weight,” said Oliver Pursche, senior vice-president at financial advisory Wealthspire.

Some stocks fell too. Shares of NextEra Energy, a producer of wind and solar power, tumbled, as traders anticipated a retreat from the green-power policies of the Biden administration.

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While shares of Tesla, controlled by Trump supporter Elon Musk surged by 15 per cent, shares of smaller rival electric car makers, such as Rivian Automotive and Lucid Motor, tumbled. Those companies are more dependent on the subsidies that Trump has promised to erase.

The most alarming sell-off was on the Treasury market, with the yield on the 30-year Treasury bond rising by the largest amount in two years. This means that US creditors anticipate rampant inflation on Trump’s watch, or that US deficits will spiral out of control, or, strategists say, most likely both.

Trump’s promises

Inflation will return if Trump follows through on tariff and deportation promises, the two cornerstones of his campaign, said one strategist.

If Trump slaps a 60 per cent tariff on phones imported from Chinese factories, the phone makers will simply pass the increase onto the consumer.

“Let’s say that Trump deports all illegal immigrants. There’s a chance your restaurant bill doubles, you can’t hire a landscaper without spending a fortune, and you can’t watch your favourite baseball team play because the players don’t have visas. Even the most hardcore anti-immigrant will have a second thought about deportations,” said Pursche.

At supermarkets across the US, price increases for meat, coffee, eggs and other staples have only just started to ease. The key roles of undocumented migrants in the food-processing industry in the US would cause those prices to spike again, Pursche said.

By definition, cutting taxes – which Trump has vowed to do by extending his own 2017 cuts that were due to expire at the end of this year – and offering more tax credits, such as a proposed write-off on car loans, will worsen the deficit picture.

Unlike generations of Republicans, Trump’s promise to increase government spending on infrastructure projects is a recipe for disaster. As a result, Trump could add US$4 trillion to US$6 trillion to the federal deficit, based on a roundup of economists’ estimates by Reuters.

Higher Treasury yields mean more expensive mortgages and loans for Americans.

The stock market will eventually sell off if Treasury yields keep racing higher, warned Lorenzo Di Mattia, manager of hedge fund Sibilla Global Fund. The Treasury sell-off is likely to continue, especially if Trump’s extravagant spending triggers a downgrade from credit-ratings agencies.

Fitch Ratings cut the US credit rating in 2023 after a prolonged debt-ceiling debate, in which Republican House leaders threatened to induce a default if their demands were not met.  

Fitch cited “expected fiscal deterioration, a high and growing general government debt burden, and the erosion of governance relative to ‘AA’ and ‘AAA’-rated peers over the last two decades”.

Governance is another risk. Some analysts and media outlets including The New York Times have warned that Trump could rule as an authoritarian-style strongman. That would tarnish the US reputation as a bastion of liberal democracy, and make credit-ratings agencies less likely to recommend US debt.

Vice-President Kamala Harris vowed to keep fighting against economic inequality in her concession speech on Wednesday. The stock market seemed to accept the conclusion of the electorate, that Trump was a better steward of the economy than his Democratic rivals; the bond market did not seem convinced.

To be sure, there could be a short-term economic boom if Trump’s tax cuts, deregulation and protectionist measures are enacted.

“The markets are getting the sugar high,” said one money manager who did not wish to be named. “The rich will get richer, unfortunately, and the minimum wage will stay the same for another four years or more.”