A clash between the US Federal Reserve and Donald Trump may ensue if inflation rebounds from the former US President’s fiscal policy ideas, a scenario which DBS Group Research is “quite concerned about”, according to its chief economist Taimur Baig in a Nov 6 note.
In this case, it may cause consternation among investors, he notes. The US came into elections in a “cyclical sweet spot”, with growth well over 2% and inflation well below 3%, a scenario of comfort which would have lasted regardless of the election outcome.
Baig says that the medium-term challenges of high fiscal debt and inflationary risks around tariffs and tightened immigration, will need to be dealt with during this presidential term. “If the president chooses not to do so, the bond market may well force his hand,” he says.
For Asia, tariffs are an “unambiguous negative” for the region, but Asia’s strong ties with the US and China would survive Trump, “we’re sure”, notes the chief economist.
“The region’s openness to trade and commerce makes it more attractive to investors, especially as the contrast with an inward-looking West becomes stark,” he says.
Although there will be more regulatory headaches, the region’s scale, excellence in manufacturing and logistics, and strong corporate and public sector balance sheets will hold them in good stead during Trump 2.0.
See also: What Trump 2.0 means for investors
“This election marks a firm rightward shift of the US; Asia has to learn to live with it,” Baig says.
Meanwhile, he notes that the so-called Trump trades have “roared” today, with stock futures particularly those in Tesla going up, while bond markets have gone down, US dollar has strengthened, and Bitcoin has rallied.
Noting that the world dealt with Trump before and will deal with him again, Baig says that Trump’s transactional nature of doing business always leaves room for some deal, even if that means further erosion of a global rules-based order.
He expects countries in Europe to attempt to deflect his wrath by pushing up domestic military spending. Asian countries will not need to go down that route, but their companies will face increasing scrutiny in their dealings with China. Chinese companies will see more of what they have seen in the past decade, more restrictions on tech access and higher cost of exporting.
