Trumponomics
The economic policies of US newly elected President Donald Trump, introducing an aggressive fiscal stimulus program which focuses on infrastructure and defense. The unpredictable economic plan suddenly gets a thumbs up from the Wall Street.
How the market reacts?
When Donald Trump started leading the poll during election day, the Dow Jones dropped gradually to more than 800 points. Before the election, the market believed that Clinton had a 70% chance of winning the election. The unpredicted election result, however, caused the stock prices to drop. The stock market increased again after the market realized that choosing Trump would not be a bad option after all. Soon after Trump announced his economic expansion plan, which is to decrease business tax and to increase government spending, the market’s reaction could be seen on the T-Bills yield curve. The bond yield curve steepened, which shows the market’s confidence about the future. The market now has a 100% confidence of interest rate hikes in the next month. In addition, stock market performance looks like the period of success seen in the 1990s. Yet, not all industries gain the benefit of the Trump effect. On the one hand, industries such as banks, small companies and construction firms are the winners. On the other hand, clean energy, hospitals, utilities and international companies are the losers in the stock market now.
Compared to other stock markets, Asian markets drops the most. The reason is because people sell their assets in Asia to purchase US assets. Malaysian currency is the most vulnerable because most of the local-currency bond holders are in foreign ownerships. In addition, the biggest loser in the currency market is the peso because of the fear of protectionism movement in the US.
Bank of Canada reacts to Trump
Stephen Poloz, the governor of the Bank of Canada (BoC), said it’s too soon to consider Donald Trump’s effect into their decision making process. He also mentioned that he’s aware of rising US bond yields and other factors happening in the neighbouring area. The loonie is expected to hit as low as 70 cents compared to US dollars. In response to this, Poloz expects Canada’s service exports will gain benefit from the low loonie. Good economic performance in the US does not however bring as much advantage to Canada as he expected. Thus, his only hope for a to better performing Canadian economy is from the export activity. Canada’s major trading partner is the US. So, if there’s a bad recession in the US or the trading partnership between Canada-US deteriorates, it would have a negative impact on the Canadian economy.
Economic Forecasts
The plan for giving a tax break for big companies such as Apple is set to boost the US economy. Apple CEO Tim Cook, leads the movement to repatriate overseas profit to the home country. He said that the amnesty program is appealing compared to the traditional 40% tax on profit. Economists believe that tax amnesty program is not a useful program in increasing tax revenue, especially in the US, where tax amnesty has been repeated several times. Big organizations and wealthy individuals would expect that the government would implement another tax amnesty program in the future, when the government needs funding for government spending. They would prefer to take the risk of sending their money overseas again with expectations of government’s forgiveness. This action would eventually lead to a decrease in tax revenue in the long term.
Forecasting the impact of Trump’s victory is hard for now. The best bet is to wait and see until he makes the exact plan in January. Hopefully, he gets the best advice from an advisor who care about the overall welfare of the economy not only in the short run but also in the long run. Now is the perfect time for economic policy makers to reflect on the current economic policies. Policy makers should adopt a pro-poor policy approach since poor or middle income people are the ones who are unhappy about the current economic condition in the US.
Check the previous article “Let’s wait awhile: US economy” to see The Federal Reserve’s reaction about Trumpflation.
