Donald Trump has made a flurry of economic announcements since retaking office, but he will be somewhat constrained by the bond market and inflation concerns.
“The state of the US economy today and in 2016 are two different things,” Kevin Thozet, member of the investment committee at Carmignac, said during an interview in Paris last week. “The kind of leeway he may have to implement whatever it is he wants to do not as significant as what people think.”
“So let’s say he wants to cut taxes. Cutting taxes without being funded means that your deficit, already at 6.5 [percent of GDP] will grow even higher than this.”
Bond yields
Thozet pointed to “” (who dump government bonds, which drives up the cost of borrowing) and stated: “The US may issue more debt, may grow higher deficits, but it will come at a price, and the price at which investors are willing to lend to the US, with deficits ever growing, is likely higher than 5%.” This “limits the speed or the extent of what he may do.”
Bond vigilantes could be partially countered with an imaginative foreign policy. For example, “basically forcing US allies to buy US government bonds so that they keep their military base” or other transactional manoeuvres.
On the other hand, Pierre Verlé, head of credit at Carmignac, stated in a separate interview that some investors from outside the US may be less likely to buy American treasuries if there is a tariff war. He said that some central banks, such as China’s, are likely “looking with interest” at what happened to the foreign reserves of Russia after its full-scale invasion of Ukraine and the resulting western sanctions. “I don’t think that foreign central banks would be surprised this time around.” That said, it’s still “too early” to have a clear view, because the cavalcade of announcements Trump made during his first week back in office have “not necessarily” impacted the markets yet.
Inflationary pressures
Thozet thinks that Trump’s deregulation policies and tax cuts could boost economic productivity and growth, but also potentially increase inflation. Specifically, Trump’s plans to raise tariffs and deport undocumented workers. “If he’s stimulating demand on the one hand and constraining supply on the other hand, you have an issue.” Economic growth will stimulate demand and Trump will be “constraining supply” with higher “tariffs, so it takes more red tape or it’s more expensive, it’s more difficult to import stuff from abroad.”
Then there are Trump’s mass deportation plans. Thozet observed: “If you’re sending one million non-Americans” who were “working in America” out of the country, then “who’s going to do that job and at what price?”
“I struggle to believe that Trump is going to manage to do everything he said” during the campaign, Verlé stated, “because that would be very inflationary and he probably won the election to a great extent because of the inflation during the Biden mandate.”
In fact, Thozet does not “expect inflation to fall below 2%” this year, and it will probably hit 2.5%-3%. He forecast US economic growth of around 2.5%.
Speaking at Carmignac’s annual investors day conference in Paris on 23 January 2025, Jacques Hirsch, a portfolio manager of the Carmignac Portfolio Patrimoine Europe fund, said that Trump will struggle to reduce the US deficit in the short-term. He did not anticipate “real changes for the economy, but more volatility in the markets.”
Supply chain worries
Indeed, geopolitics is “the elephant in the room,” Verlé stated in the interview. “I’m more concerned about the impact of geopolitics not only in Ukraine but also around China” than the impact of bond rates. “The potential disruption in supply chains if we have segmentation [of trading ties and] more tariffs” will have a big impact on corporate profitability.
Carmignac provided travel and accommodation in Paris during its investors conference