Donald Trump’s Return to the White House Heightens Global Uncertainty

Donald Trump’s return to the White House significantly heightens global uncertainty. How severe will the trade barriers be and when will they come into effect? Could there be exceptions? And how will other countries respond? How much will a potential trade war affect inflation? How will currencies adjust? Will the Fed remain independent? How will the US government’s public finances change? Even though we’ve already revised our forecasts, further adjustments will be needed as we get more clarity. As for inflation, some risks remain, even though it’s below target in many countries. In addition, labour disputes could multiply, especially in Canada and the United States. This would disrupt economic activity and put even more upward pressure on wages and inflation. Also, there is still a great deal of uncertainty over the lagged effect of higher interest rates on economic growth. It’s therefore quite possible that some central banks may be forced to cut rates faster, while some others may have to slow down. This could lead to a lot of volatility on foreign exchange markets. The potential rise in US bond yields could also mean Canadian bond yields won’t fall as much as expected. That would result in less attractive mortgage rates that could make it harder for Canadian homeowners to renew their mortgages. Some borrowers may have trouble making payments, and the number of active listings could soar. Tenants are also under increasing pressure. Furthermore, there could be a spike in layoffs, which would increase unemployment and have unwanted repercussions on the housing market and credit in general. The worsening (and widening) conflict in the Middle East has caused broad swings in oil prices that could get even bigger. The global economy, financial markets and commodity prices could adopt an even more unstable trajectory if the geopolitical and economic climate deteriorates further. Even if we ignore these risk factors, financial markets seem ripe for a correction after the exuberance that pushed the valuations of many risk assets to extreme levels this year.

For now, equity markets are welcoming Trump’s election with significant optimism. In the short term, some of his proposals could have positive effects on the economy and corporate profits, especially in the United States. However, investors are also expecting mounting inflationary pressures and fiscal deterioration in the US. These factors have pushed up bond yields. The US dollar has also strengthened against most other currencies.

We’ve made several adjustments to our financial market forecasts. First, we expect there to be less room for interest rate cuts in the United States. In contrast, we’re predicting more rate cuts in Canada in response to bigger economic challenges. Taking Canada’s policy rate down further than previously expected would help limit the rise in Canadian bond yields and resultant tightening of financial conditions. As a result, the Canadian dollar will probably continue to be adversely affected by widening spreads between Canadian and US interest rates. Many other currencies face a similar fate. Finally, we also revised our forecasts for commodity prices downward as global demand appears to be weaker than expected, while supply will probably ramp up due to increased production in the United States, especially with respect to oil. We also think the more uncertain global economic outlook may cause stock markets to lose their upward momentum in 2025.