Just over a month ago, the US bond market concluded that Donald Trump would be the next president of the US, and bond prices slumped. To a lesser extent, the share market is now being impacted by the bond market’s “Trump will win” conclusion.
I called opinion pollster Gary Morgan and discovered he believes the bond market signals are right. Trump was in a similar opinion poll position in 2016 when he beat Hillary Clinton. Morgan says the 2024 election is likely to produce a similar result because the US election is like the local voice referendum.
Many Australian “No” voters and a significant number of Trump voters do not declare their intentions because in their friendship circle, supporting Trump and “No” are not acceptable views.
At the core of the Trump campaign is a 20 per cent tariff on most imports and a 60 per cent tariff on imports from China. The money raised will be used to reduce both corporate and individual taxes.
This will be inflationary, so the bond markets now believe that if Trump wins US inflation will rise so the expected interest rate cuts will not take place. And so in mid-September traders, believing Trump would win, began selling bonds and pushing yields higher.
The 10-year bond now yields around 4.2 per cent, compared with 3.6 per cent in September – a massive self off at a time when world inflation is coming under control.
Also influencing the bond traders is the fact that while the Kamala Harris campaign focuses on Trump, she does not set out a clear plan of action. Bond traders say Trump is winning the campaign because Harris is a weak candidate.
In theory, large US corporations should delight in the lower corporate taxes and a revival in US manufacturing, plus the lower energy prices promised by Trump.
But many of the large corporations have engineered their finances so that they don’t pay large amounts of tax, so the cuts have limited benefit.
And because they import goods, they will now be paying tax via tariffs. They don’t like the prospect.
In addition, many of the large corporates are so called “woke” companies and Trump’s energy and other policies do not accord with the personal views of the directors, so large amounts of corporate money is being directed towards the Harris campaign.
Rightly or wrongly, the bond traders are ignoring the Harris corporate money, although the lower energy prices generated by Trump’s gas and oil drilling programs will curb the inflation the bond sellers are fearing.
Trump’s individual tax cuts contain an element we have rarely seen in political campaigns. Trump will lower the role of income taxes in revenue raising and this in turn increases fear among bond traders that the large amounts of money may be required to be raised in the US which will boost interest rates.
CNBC calculates that Trump’s personal tax plans offer total or partial income tax exemptions to roughly 93.2 million Americans – “a meaningful chunk of the US electorate”.
Trump has officially proposed eliminating income tax on tips and social security benefits along with overtime pay. Trump also says he will consider tax exemptions for firefighters, police officers, military personnel and veterans.
Many economists say Trump’s plan to reduce the role of the income tax system and replace the revenue from tariffswill boost government deficits, which is not good for bonds.
And the higher cost of imports will generate US industry expansion, which will not necessarily be able to match current import costs.
The man who is driving the Trump tariff policy, Robert Lighthizer, has been passionately campaigning for similar policies for at least 25 years. I remember meeting him as a young lawyer at the World Economic Forum, so I am sure Lighthizer has detailed plans and Trump will require him to implement them swiftly.
A Trump win at the next election is causing a split in the ranks of US allies and opponents. Because of the blows of China, Australia will not be a winner from the Trump policies, although we may get tariff exemptions because of our close defence links.
The London FT reports that The pro-Trump camp includes Israel, Russia, India, Hungary, Argentina and Saudi Arabia.
In the pro-Harris camp there is Ukraine, most of the EU, Britain, Japan, Canada, Brazil, South Africa.
Trump’s promise to impose 20 per cent tariffs on all imports threatens the European economy, led by Germany. But the FT points out that Italy’s Giorgia Meloni has political roots in the far right and may feel well positioned to mediate between Trump and the EU.
India’s Modi’s government has signed important agreements with the Biden administration. But Modi sees the Democrats as too inclined to pressure them on minority rights and the protection of democracy.
Many in India blame interfering US liberals for bringing about “regime change” in Bangladesh earlier this year — which the Indians fear will bring Islamists to power.
The bond markets now have a big stake in a Trump win. It does not mean the bond traders will be right.
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