The global political backdrop is drastically changing as populist parties become mainstream, seeking to undo the neoliberal global system that is seen as having failed too many. We are witnessing the emergence of nationalist politics, bigger government footprints, growing distrust between nations, and a push to prioritise the lot of workers over corporations. This is how globalisation ends and that has huge financial implications.
Whilst it’s been a chaotic start, President Donald Trump does have a plan aimed at improving the lives of his voters and strengthening national security. Treasury Secretary Scott Bessent articulates this shift clearly, outlining plans to pivot the US economy away from consumption-led growth towards one driven more by investment. This would eventually enhance growth potential, raise productivity, and offer better prospects for workers.
The first part of the plan is to lower fiscal spending, which will enable lower interest rates and easier funding of the national debt that’s deemed to be on an unsustainable path. The fiscal largesse of recent years has pushed inflation and interest rates higher, hindering private sector investment and further widening inequality. As the government pulls back, the desire is that the private sector should step in and invest. Tax cuts for corporations are on the way alongside deregulation of banks to enable lending to support these efforts. Energy sector deregulation will also lead to cheaper energy production, helping lower interest rates and consumer prices. Tariffs are also being used to ringfence domestic companies and encourage onshoring to make them competitive in a strong-dollar environment.
The goal is to bring back manufacturing, a sector that utilises relatively more investment and has a higher productivity rate, which should help secure the US in a fractured geopolitical world and provide higher-paying jobs.
Currency moves
There are also second- and third-order effects that will support this endeavour. Whilst the trade deficit gets a lot of airtime, currency market moves are dictated by global capital chasing returns, not trade flows. The last 20+years have been marked by chronically deficient demand in the ex-US global economy. This has meant that US consumers bought goods from the rest of the world and those earnings were invested in the US asset markets, bolstering US asset prices and the dollar. This process further widened the current account deficit, boosting domestic US wealth, and encouraging more consumption. As it rolled on, this gutted the manufacturing base of the US, damaging national security and turning the US into a wage stagnant service economy. There is nothing within the current dollar-based system that can correct this imbalance.
Globalisation has benefited corporations, not workers
Trade or tariffs go hand in hand with capital flows. By changing the rules, this feedback loop can be reversed, leading to a weaker dollar. Geopolitical friction will also encourage other sovereigns to stimulate their own domestic demand if the US cannot be relied on for trade and defence. Germany and China are already stimulating for these reasons. A weaker dollar will also massively ease global financial conditions due to the extent of global dollar debts in the system and allowing emerging markets (EM) central banks to reduce rates without having to worry about financial instability.
Tariffs and recession risk
That’s the plan anyway, but it is fraught with risks. It’s a process that needs to be implemented carefully and gradually. Tariffs function as a tax as it removes money from the economy and hurts consumers and businesses alike. This could damage animal spirits that have kept the US relatively strong. Real incomes of consumers may decline, squeezing corporate margins and raising the risk of a drop in sales. All of these are the key reasons the US economy has been so dominant for so long, as no other developed market corporations have capitalised on globalisation like the US. A hit to confidence on both consumers and corporates could propagate a recession. What’s more, with inflation still above target, higher tariffs might prevent the Federal Reserve from lowering rates. After all, it was the decline in goods prices that has helped cool inflation down since 2022 even as services remained sticky.
Things have moved quickly since ‘liberation day,’ but a walk-back is occurring as cooler heads prevail. Bessent knows that markets need to be kept onside. You can shrink the trade deficit easily by going into a recession but that’s in no one’s interest. Some deals are being struck to limit damage, but even in the case of the UK, a 10% minimum tariff remains. That means the UK is no better off than before “liberation day’’. Other countries shouldn’t expect better treatment, given that the UK does not run a trade surplus with the US. The blanket US approach also makes little sense as the US can’t produce everything and is not interested in some sectors. We expect easy deals with countries (mostly EM) that supply low end goods (furniture, wood, clothes) and raw materials, while high-end manufacturing (phones, autos, equipment) face stiff barriers.
Tariff policy is here to stay but could be more targeted, but the transition is still not easy and not assured (ask the UK how its growth rate is) as the private sector has to be upbeat, confident and onboard. Regardless anyway, near term there will be a hit to US productivity, even if there is a chance for the emergence of a vibrant and more balanced global economy by 2026/27.
Bond market in focus
If there ever was a time to do this experiment it is now. A recession is by no means guaranteed. Private sector balance sheets for both consumers and corporates are in great health, with few imbalances, as seen by their commanding performance during the post-Covid rate hikes. Record US corporate margins and record US wealth levels have kept the global economy going and recent data resilience shows this is ongoing. Whether it unravels is largely down to how corporates behave with lower earnings and whether they start to lay people off. The US administration is now working to prevent that as they realise the Fed can’t help if the government’s policies are too aggressive.
Weaker US assets and a lower dollar seem assured and almost welcome but what about the bond market?
In terms of timing, this is more of a problem as the bond market continues to show the strain as government debts are high, and deficits have not been reined in. In fact, the US deficit was $1.05 trillion for the 7-months through April, up 23% from a year earlier1, casting doubts about whether revenues from tariffs would be able to bridge this gap, particularly when government spending is rife. Looking across the globe, given the geopolitical shifts, this spending is unlikely to change anytime soon.
US fiscal premium is building
For the US, interest rates are still at restrictive levels, elevating debt costs. Stagflation pushes growth down and inflation up, leading to a fall in tax receipts. But relief interest rate cuts won’t be forthcoming, which would increase the need for debt issuance. A trade war also undermines demand for US assets and the dollar, with clear risk of demand waning from countries caught in the crossfire. This is causing the policy rates to be compounded by steep curves. In a world of disrupted trade and capital flows, bonds lose their diversification potential for investors, further undermining their appeal. Until something changes, the market will baulk at US debt exposure and the shape of the yield curve will reflect US policy credibility. This makes the manoeuvres of the administration even more difficult and has no doubt forced the recent change in tack in response to the harm caused by higher rates.
The US administration’s radical policy experiment is aimed at rebuilding the domestic manufacturing base through investment-driven growth and boosting real incomes of workers that have stagnated for years. While the policy changes could hold potential positive outcomes for the US economy in the medium to long-term, possible pitfalls in the near term could include reduced growth, higher inflation as well as the widening of budget deficit. Therefore, the government should tread a fine line as its moves towards achieving its goal. All these will have huge financial market implications, and I expect the bond market will police the administration’s moves closely.
Footnotes
1 Monthly Treasury Statement (MTS) | U.S. Treasury Fiscal Data
Il valore delle menti attive: il pensiero indipendente
Una caratteristica fondamentale dell’approccio di investimento di Jupiter è che evitiamo l’adozione di una view della casa, preferendo invece consentire ai nostri gestori specializzati di formulare le proprie opinioni sulla loro asset class. Di conseguenza, va notato che tutte le opinioni espresse, anche su questioni relative a considerazioni ambientali, sociali e di governance, sono quelle degli autori e possono differire dalle opinioni di altri professionisti degli investimenti Jupiter.
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This document is intended for investment professionals* and is not for the use or benefit of other persons, including retail investors. This document is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the individuals mentioned at the time of writing, are not necessarily those of Jupiter as a whole, and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. Every effort is made to ensure the accuracy of the information, but no assurance or warranties are given. Holding examples are for illustrative purposes only and are not a recommendation to buy or sell. Issued in the UK by Jupiter Asset Management Limited (JAM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ is authorised and regulated by the Financial Conduct Authority. Issued in the EU by Jupiter Asset Management International S.A. (JAMI), registered address: 5, Rue Heienhaff, Senningerberg L-1736, Luxembourg which is authorised and regulated by the Commission de Surveillance du Secteur Financier. For investors in Hong Kong: Issued by Jupiter Asset Management (Hong Kong) Limited (JAM HK) and has not been reviewed by the Securities and Futures Commission. No part of this document may be reproduced in any manner without the prior permission of JAM/JAMI/JAM HK.
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