Even before he’s in the top job, US president-elect Donald Trump has had an enormous impact on financial markets.
And not in the way that many expected.
US stocks are hitting all-time highs, the US dollar has stormed to a 13-year high, commodities are rallying and bonds are getting obliterated.
And inflation expectations are lifting, boosted by the prospect of a free-spending Donald Trump who, as his campaign slogan stated, will “make America great again”.
The markets certainly think so, and, as a consequence, they now think the US Federal Reserve will be far busier than what they’ve been in many years.
Nothing demonstrates this better than the chart from Bank of America-Merrill Lynch (BAML) below.
It shows expectations for where US interest rates will sit in the future, comparing market expectations before and after Trump was elected as president to the median estimate from Fed members.
There’s been a noticeable shift higher, indicating that it won’t be another ten years before the Fed hikes rate again.
Indeed, financial markets are now 100% certain that the Fed will hike rates in just three weeks time.
It’s in the bag.
While it expects the Fed will only follow that increase up with one more in 2017 — slightly below current market expectations — BAML’s economics team think that rate hikes will accelerate sharply in 2018, and not just because of fiscal policy.
“During 2018 we expect the regional Fed bank voting composition will likely again shift hawkish with Fed presidents Mester and Lacker moving back on the FOMC. This should provide a less accommodative slant even without taking President-elect Trump appointments into consideration,” it says.
“This voting rotation, President-elect Trump’s appointments, and the phasing in of near-term stimulus supports our view that the hiking cycle will accelerate – we forecast three Fed hikes in 2018.”