Trump is here: these are the scenarios
On 20 January, the new US President Donald Trump took office, and the world is left speculating: What will happen next? “In the most likely scenario, Trump will implement large parts of his plans,” explains Carsten Gerlinger, Managing Director and Head of Asset Management at Moventum AM. “The consequences would be higher inflation, rising interest rates, and pressure on stock markets.” Even if Trump takes a more restrained approach, uncertainty remains.
Since Donald Trump’s election victory in November, there has been considerable uncertainty in financial markets. It is unclear which of his plans the new US president will be able to implement. Three of his main proposals include the mass deportation of illegal immigrants, tax cuts, and an increase in import tariffs. During the election campaign, Trump announced plans to impose a 60% tariff on goods from China, with tariffs of 10% to 20% for the rest of the world. Part of the tax cuts would be funded with revenue from these tariffs.
What would the economic and market consequences be? “In the first scenario, which has a 60% probability, Trump largely implements his plans,” says Gerlinger. This would lead to an increase in inflation, as deporting immigrants would put pressure on the labour market, and tariffs would drive up the prices of goods. “As a result, the US Federal Reserve (Fed) would not only abandon its path of cutting interest rates,” Gerlinger continues, “but a renewed upward shift in interest rates is to be feared.”
In this scenario, short-term yields would initially remain at a low level before starting to rise again. Long-term interest rates, however, would climb more sharply, reaching 5.5% to 6% before falling again due to a looming recession. The yield curve would once again become inverted. In Europe, the central bank would initially cut interest rates further before hitting the brakes and aligning its policy with the US Fed. “The growing interest rate differential will strengthen the dollar,” Gerlinger adds. In the long term, however, Trump’s policies would result in a loss of confidence, weakening the dollar. On the corporate side, higher costs would sustainably shrink profits, burdening stock markets. “We see a downside risk of up to 20%,” Gerlinger predicts.
In the second scenario (40% probability), Trump governs more moderately. In this case, the inflation rate would fluctuate between 2% and 4% (recently at 2.9%). The Fed would refrain from further rate cuts due to a strong economy. As a result, short-term yields would remain at their current levels, while long-term yields might test 5% or even 5.5%. Fluctuations in yields would continue, similar to 2024. Stock markets would also experience increased volatility. In Europe, the ECB would continue cutting interest rates to support economic growth. The widening interest rate differential would initially strengthen the dollar. “However, residual uncertainty remains, and a policy shift could occur at any time,” concludes Gerlinger.
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