Union Connect: Trump creates uncertainty around US growth

Statements by the US President-elect lead to sector turbulence
US inflation decline comes to an end - latest economic data show solid growth
Federal Reserve takes a wait-and-see approach and is likely to cut key interest rates only gradually
Rising yields on the US bond market reflect increase in the term premium

Even before the inauguration ceremony on January 20, the 47th US President Donald Trump made provocative statements at a press conference. For example, he claimed Greenland for the "free world" out of national security interests, as he said, otherwise high tariffs would be introduced on products from Denmark. He threatened to take over the Panama Canal and declare a national economic emergency to introduce new import tariffs. In addition, Trump emphasized that the countries of the North Atlantic defense alliance NATO should invest five percent of their gross domestic product in defense instead of the current two percent. He also called for the USA to merge with Canada, but said that the USA was not dependent on Canadian timber and dairy products. He added that he would also try to establish a policy in which no more wind turbines would be built.

This should set the tone for the next four years in the White House: Investors will have to be prepared for headline-grabbing statements, each of which will have to be closely scrutinized as to their fundamental (capital market) relevance. Depending on this, the half-life may be short or of a fundamental nature. Overall, US President Trump is increasing the erratic element in (economic) policy decisions and thus the uncertainty and possible range of fluctuation on the capital market. This was exemplified by the stock market, where shares in wind turbine manufacturers such as Vestas and Nordex came under pressure following Trump's statements on the wind industry. These stocks have been trending weakly since Trump's election in November. In contrast, defense stocks such as Rheinmetall rose following his statements on NATO.

While the US equity market barely reacted overall, the Asian markets suffered losses due to concerns about an escalation of trade conflicts. New concerns among market players about higher inflation and the associated reduction in interest rate cuts also contributed to losses on the bond market. These were already under pressure following hawkish statements by the US Federal Reserve (Fed) in December. The yield on ten-year US government bonds rose to 4.77% by at midday on January 10. , its highest level since November 2023. Bond prices also came under pressure worldwide and yields rose.

USA: Robust economy prevents decline in yields

Economic expectations influence yields

Source: Bloomberg; as of January 10, 2025.

High divergence - industry weakens

Source: Bloomberg; as of January 10, 2025.

Solid economic and labor market data

Fundamental reasons also play a role here. For example, the decline in inflation in the USA is coming to an end. According to the economists at Union Investment, the positive growth environment is likely to continue for the time being, as shown by the latest data on the Purchasing Managers' Index (ISM) in the manufacturing and services sectors. A significant increase in the price component for services shows that the cyclical low in inflation has been passed and the inflation rate will remain above the Fed's two percent target. The labor market has also recently seen a surprising increase in job vacancies. However, the experts at Union Investment do not interpret this as an increase in bottlenecks on the labor market, as the shortage measures are at or below pre-pandemic levels. Rather, the market is currently in equilibrium. A pronounced weakness that could drive the Fed to cut interest rates further is therefore not evident. The data on new jobs published on 10 January , which came in higher than expected, even point to a solid labor market trend.

The Fed minutes of the December meeting presented on January 8, also showed that the decision to cut interest rates by 25 basis points (bp) was ambiguous, as some members of the Federal Open Market Committee (FOMC) were not convinced. The hawkish tone reflects the statements made at Fed Chairman Jerome Powell's press conference in December, which led to a slide in share and bond prices and the pricing out of rate cut expectations. Economists at Union Investment currently expect a reduction in the pace of interest rate cuts and believe that a total of two further rate cuts are conceivable this year - probably in the first half of the year. After that, the Fed is likely to take a wait-and-see approach in view of the increased uncertainty caused by the new US government under Trump.

In the medium term, the decisive factor for the capital markets will be which political measures the new US government actually implement. According to the economists at Union Investment, this, as well as the underlying economic momentum, will be decisive for the future path of inflation. Trump's inauguration increases uncertainty about future economic development - not just for the US, but for the global economy as a whole. According to the experts at Union Investment, his economic policy agenda, particularly in the areas of trade and migration, will have a dampening effect on growth. However, this effect will not be felt immediately, but only gradually, from around mid-2025. How strong it will be depends, among other things, on the specific design and timing of the measures.

Rising term premiums for US Treasuries

However, the basic picture of Union Investment's economists for 2025 remains intact: They expect moderate growth worldwide, with economic momentum varying greatly between regions, particularly in comparison between the USA and core Europe. For the equity markets, this means that the environment is likely to remain supportive for the time being. Important drivers such as growth in investments in the field of artificial intelligence remain valid. However, price gains could flatten out later on.

As far as the interest rate market is concerned, interest rate cuts have been priced in, particularly in the USA. The market is currently expecting fewer cuts than the experts at Union Investment. In their view, the most important driver for the recent rise in yields on US government bonds is rising term premiums, which compensate for the risk of future interest rate changes. Since Trump's re-election became increasingly likely, the term premium has been responsible for more than three quarters of the rise in yields.

Despite the recent rise in yields on the Treasury market ahead of the auction of ten-year US government securities on January 7, the result of the auction was disappointing: the yield on the new bonds rose slightly by 0.2 basis points afterwards. However, the underlying demand was roughly in line with last year's average. The bond experts at Union Investment expect US term premiums to rise further in the coming months and are therefore cautiously positioned in long-dated US Treasuries. However, even if US government bonds become riskier under Trump, they are still relatively safe compared to other US financial securities. There are also likely to be efforts within the new Trump administration to prevent the government's budget deficit from exploding any further.

Source: Union Investment, all information, explanations and illustrations are as of 10 January 2025, unless otherwise stated

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