- Equities have surged due to increased Fed rate cut expectations.
- Trump failed to indicate that import tariffs would be immediate.
- Goldman Sachs downgraded its forecast for a universal tariff from 40% to 25%, boosting stocks.
Equities rallied on Tuesday as investors cheered the soft start to Trump’s term. Trump’s administration failed to give clear guidance on the implementation of tariffs. Consequently, experts believe the new government will take a more cautious approach, delaying any trade wars.
S&P 500 Index (Source: Bloomberg)
Since last week, equities have surged due to increased Fed rate cut expectations. Economic data last week showed a slight slowdown in the US economy, supporting bets for at least two rate cuts this year. Underlying inflation in the US came in below estimates in December. Meanwhile, headline inflation aligned with forecasts. Consequently, traders moved from pricing one interest rate cut to two.
At the same time, retail sales came in lower than expected, pointing to weak consumer spending. Previous reports had convinced traders that the Fed would implement only 27 bps of rate cuts this year. Notably, the labor market remains resilient despite high interest rates. Therefore, the soft figures rekindled hopes of more rate cuts this year, boosting equities.
At the same time, policymaker remarks showed support for more rate cuts. Christopher Waller noted that the US Central Bank might still consider three of four rate cuts this year.
Further support for stocks came on Monday when Trump failed to give any indication that import tariffs would be immediate. The new president focused on immigration laws and taxes, giving the impression his administration would go soft on tariffs. Consequently, expectations for trade wars fell.
However, Trump later noted that he might impose import tariffs on Canada and Mexico as soon as February 1. Meanwhile, he said the country was not ready for a universal tariff. As a result, Goldman Sachs downgraded its forecast for a universal tariff from 40% to 25%, boosting stocks.
In his 2016 term, Trump started a trade war with China. This caused a lot of turmoil in the markets. Nevertheless, equities soared during his 4 years of presidency. During his campaigns, he had threatened a 60% tariff on goods from China, sparking fears of another trade war. If he eventually implements it, risk appetite might drop, hurting the equity market. At the same time, consumer inflation will increase, forcing the Fed to keep interest rates at restrictive levels.
