Trump Ego on show at Davos
Author: Tom McGrath CIO, 8AM Global
Amid all the noise and bluster from the new President, both equity and bond markets made progress last week, largely as we haven’t been hit by the barrage of tariffs that many had feared. They may yet come of course, as Mexico, Canada, Europe and China have all been put on notice, but there is already a sense that Trump may well be heeding the advice of his team and could be less draconian than expected. His speech at Davos was the unfiltered Trump, like a new kid at school bragging about how wonderful he is and all the amazing things he can do. Shock and Awe was what he was aiming for, to a largely European audience and I think it was received as uncouth and insulting, but there were some interesting economic takeaways. Let no one be under any illusion that he is absolutely determined to get the US economy humming and he thinks that deregulation, AI investment, tax and rate cuts are the way to achieve this.
The oil price must go lower through increased production and OPEC price cuts. I quite like the simplicity of this approach. As well as battered supply chains, the high oil price has been the major contributor to inflation. So logically a lower oil price could offset a fiscally boosted economy and throw in some AI induced productivity gains (which would be deflationary) and hey presto we get growth without inflation. If he pulls that off, I will indeed be both ‘shocked’ and ‘awed’.
Back to basics though, the absence of an immediate wave of tariffs is good news and suggests that Trump 2.0 is more considered than its predecessor and probably listening to the experienced team around him. ‘America First’ was the narrative we had been expecting and investors had made the obvious calls, long the Greenback and a bias towards US assets, but with no new tariff announcements in Donald’s first week, we’re seeing sentiment improve around global, ex US equities and the dollar weakening. I find it fascinating how often the contrarian position proves to be the right one, incidentally year to date, the FTSE 100 is actually outperforming the S&P 500, wouldn’t that be something if that’s the way we finished 2025 given our economic woes!
I think this week the ‘rubber might hit the road’ as I suspect the question of tariffs is about to occupy centre stage and it will be interesting to see who T2 goes after first. We also hear from the Fed, and as much as Trump would like them to cut rates again, I can’t see that happening any time soon. Ultimately the President’s policies are probably likely to amplify inflationary pressures further. Tax cuts will inject additional demand into an economy already growing at nearly 3%. Plans to deport millions of undocumented workers are likely to exacerbate labour shortages in critical industries such as agriculture and hospitality, and any tariffs, according to my basic economics, will raise import prices, fuelling inflation across multiple sectors. That’s enough for them to hold rates at current levels, but I can see a clash between the Fed and the Oval office building, and I bet J Powell is relieved he only has to endure the pressure until he leaves office next year.
From the subjective to the objective…
US Earnings have started well and I continue to believe this is what is likely to sustain the current bull market. According to the FactSet e mail that hit my inbox on Friday, things are going better than expected. Big tech opened up well with Netflix delivering a beat and raising guidance. With 16% of the S&P 500 companies now reported for Q4 2024, 80% have reported actual EPS above estimates. In fact we are on course for the biggest year on year increase (estimated 12.7%) since the covid bounce back in 2021. Microsoft and Tesla report this week so we will get a better idea if Big Tech are going to deliver as they have so often, so far.
UK – Doom and gloom with a sprinkling of hope
Despite the great start to the year from the FTSE 100, all is not well with the UK economy, the data is mostly worrying, and we also got a slight tick higher in PMIs. The thing that set my alarm bells ringing was news from Standard & Poor that the rate of job-cutting in January and December in the UK was the fastest since 2009, (barring the pandemic) with firms cutting headcounts for a fourth straight month. No wonder there has been a sharp fall in consumer confidence which tumbled to the lowest since before Labour returned to power, as the fallout from Chancellor Rachel Reeves’ budget continued into the new year.
The January UK flash composite PMI survey suggests activity continued to stagnate going into 2025. While the survey was stronger than expected, it still signalled ongoing weakness, with the further drop in employment levels in the private sector. The problem is that despite the economic woes, inflationary pressures have reignited, which poses a growing policy quandary for the BOE as they face the prospect of Stagflation. I think on balance the Bank has to try another rate cut of 0.25% in February as with growth fading, even if we get a Q1 blip higher in the inflation data, further out inflation could drop significantly.
Perhaps this ‘bad news’ might be good news for investors. As well as it creating the increased likelihood of a rate cut, gilt yields fell taking some of the heat off the government. One other thing I was comforted by at the World Economic Forum in Davos, was Charlie Nunn CEO of Lloyds Banking Group, expressing optimism about the UK’s economic prospects. He noted that household finances have strengthened, with deposits and savings increasing by 6% year-on-year. While acknowledging that some customers are struggling to make ends meet, he emphasised that many households have seen improvements in their financial positions. Maybe at a grassroots level, for people not having to refinance a mortgage, it is better than the top-down macro data suggests…
Japan update
The Bank of Japan (BOJ) raised its key policy rate to 0.5%, the highest since 2008, reflecting growing confidence in inflation’s strength and Governor Kazuo Ueda indicated further hikes might follow. With Japan now nearing parity with other developed economies on interest rates, the BOJ is positioning itself for a more conventional monetary policy framework. Prime Minister Ishiba’s cabinet has shown little resistance to the hike, easing political tensions and supporting the central bank’s decision as part of a broader strategy to navigate inflation and economic uncertainty.
As far as the equity market prospects go, the opportunity remains a ‘bottom up’ story. Structural reforms, buy backs, reduction in cross holdings, improving margins and a real focus on shareholder value should ensure strong earnings growth, even if the macro doesn’t help.
European update
We hear from the European Central Bank this week, which is widely expected to cut rates by 25 basis points on Thursday, with further reductions likely as policymakers focus on mitigating potential risks from Trump’s tariffs and remain calm about inflation. I will be listening out for President Christine Lagarde’s post-meeting remarks to see where they might go next, but the ECB, I think, have done a good job of cutting rates just in time to avoid the region heading into recessionary territory.
European business activity showed signs of improvement last week, with PMI readings generally exceeding expectations. The Eurozone’s private sector returned to modest growth in January, indicating some recovery in economic momentum. Germany’s private sector stabilised after six months of contraction, reflecting a more positive outlook. However, the recovery was uneven across the region. In France, the services sector continued to struggle, remaining in contraction territory, highlighting persistent challenges in some parts of the Eurozone.
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