While 2024 has been conducive to risk-taking, the new year could bring tougher headwinds with the start of US president-elect Donald Trump’s second term. Tariffs could be the proverbial tail that wags the dog in 2025, says Selena Ling, chief economist and head of global markets research and strategy at OCBC.
In her comments fronting the 159-page OCBC 1H2025 Global Outlook, Ling cites lyrics from American pop star Ariana Grande’s 2024 single “We Can't Be Friends (Wait for Your Love)” in describing the volatility that 2025 may bring: “We can’t be friends, but I’d like to just pretend.”
President-elect Trump will only be inaugurated on Jan 20, 2025, but already his somewhat “controversial and unorthodox policy priorities” in terms of tackling inflation, immigration and the economy has both allies and non-allies anticipating the changes that will be on the cards in short order, says Ling.
Ling expects a turbulent US leader to throw a spanner in the works for many outlook reports. “While OCBC has painted a balanced global macroeconomic outlook, the dispersion of potential outcomes is significantly wider,” she adds.
“Hence, simplistic assumptions [about] the current post-US election euphoria playing out in financial markets (such as a stronger US dollar, higher returns from US equities and higher US Treasury bond yields) may not sustain for the year ahead, as material assumptions would be whether or when those Trump policy shifts materialise and if the bite is as bad as the bark,” says Ling.
Bessent a ‘safe hand’
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Market-watchers have been eyeing Trump’s key appointments. In particular, the Treasury Secretary nomination of Scott Bessent has shone the limelight on his “3-3-3” plan — a framework to achieve 3% economic growth, trim the deficit to 3% of GDP and increase oil output by 3 million barrels per day.
Bessent is seen by markets as a “safe hand” and also a fiscal and deficit hawk, says Ling. “How fiscal policy will play out in 2025 is important, but in the interim, swings in monetary policy expectations have rattled financial markets as pricing of future US Federal Reserve rate cuts have been significantly pared back with some speculation that a pause may be imminent.”
Investors want to know whether this will diminish the US dollar’s allure and, perhaps more importantly, whether the S&P 500 can keep going beyond the year-end forecasts of 6,500 to 6,600 points that many on the street are eyeing, says Ling.
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“Hence, while we are generally constructive for the year-to-date, the dark clouds are looming, and greater market volatility appears likely given major trade actions,” she adds.
Global trade volume already fell 0.9% m-o-m in September, with import weakness in Emerging Asia ex China (-5.8% m-o-m), Euro Area (-0.6% m-o-m) and China (-0.3% m-o-m), whereas the US outperformed (+4.5% m-o-m), according to US Customs and Border Protection (CBP).
Reflationary Trump?
The overall disinflation trajectory remains intact for now, but the outlook ahead has a wider tail risk, says Ling. “Should Trump 2.0 prove inflationary for the US economy and the global economy, the Fed’s leeway to bring policy rates down to their estimated terminal or neutral rate may be shortened.”
While the Fed has been reticent on committing to a preset path or making assumptions about policy implications from Trump after he takes office in January 2025, the market pricing of future rate cuts has been pared back to only a half chance of another 25 basis point (bp) rate cut at the December Federal Open Market Committee (FOMC) meeting and roughly 50bps cumulative cuts for the whole of 2025.
“We believe that market pricing of the Fed rate cut trajectory tends to be volatile and potentially over-exaggerate the possible outcomes depending on the flavour of the day,” says Ling. “Just reference the wide swings in 2024 from pricing in seven cuts to no cuts in 1H2024.”
Nevertheless, the Fed’s path remains “highly data-dependent”, says the economist. “Hence, any data surprises, whether on the inflation or labour market front, will continue to amplify in the days and months ahead. Meanwhile, note that credit market spreads remain extremely tight as too much liquidity is still chasing for yields.”
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Policy offsets
2024 has been conducive to risk-taking, which Ling calls a “silver lining”. “The global monetary policy easing cycle has started, albeit a little later than expected, and the global soft-landing narrative has largely panned out so far.”
Looking out from here, whether financial markets in 2025 will continue to sustain would require “substantial policy offsets” to the growing headwinds. “While Trump’s push to reduce government bureaucracy and inefficiency, extend the 2017 Tax Cuts and Jobs Act (TCJA) promote de-regulation could generally be positive catalysts for US growth in the coming year, there could be negative offsets to US and global growth from the tariff shocks.”
Moreover, the US’s tariff revenue is likely seen as necessary to help fund the US$7.75 trillion increase in the fiscal deficit required to fund Trump’s plans, as estimated by the Committee for a Responsible Federal Budget.
However, the key difference this time under Trump 2.0, Trump is “dead serious” about tariffs as part of his “Make America Great Again” strategy, throwing elevated tariffs levels with fewer institutional or tangible constraints, says Ling.
Conversely, retaliation is also more likely, according to Ling, as targeted countries see less flexibility for placating Trump, whether through increasing purchases of US goods or onshoring some manufacturing activities in the US.
“Hence, economic pain for both sides is a very plausible scenario ahead, even though it remains uncertain whether 2025 will bear the full brunt,” she adds. “A realistic scenario is that the strategic de-risking — even de-coupling — narrative will continue in the years to come.”
