President Trump’s first day in office was consistent with his campaign promises and appealed to several high priorities for his base – controlling immigration, reducing inflation by unleashing US energy, and cutting government regulation. We believe that the changes to immigration policy are the most significant of his first actions as president from a macro perspective, and we will be closely monitoring developments on trade policy in the weeks ahead.
What happened
Donald Trump took office for the second time to become the 47th President of the United States on Monday. In his inaugural address he vowed to create a golden age for Americans and put his America first agenda in place. Among his first actions were signing 26 executive orders, including declaring a national emergency at the southern border, a national energy emergency, reducing government regulation, and rescinding seventy-eight Biden-era executive actions and orders.
The executive orders on immigration and protecting borders were among the most striking – reinstating the “Remain in Mexico” policy, activating the Alien Enemies Act of 1798, designating drug cartels as terrorist organisations, and ending refugee resettlement and other programs for asylum seekers.
On Trade policy the White House put forward a comprehensive plan to investigate various trading relationships, including unfair trade practices, FX policies, assessment of existing trade agreements, reconsideration of China’s Permanent Normal Trade Relations (PNTR) status, and calls for potential tariffs. Moreover, President Trump later reaffirmed that 25% tariffs could be imposed on imports from Mexico and Canada from 1 February 2025.
Cutting government regulation was another focus of Trump’s first actions as President. He announced the creation of the Department of government efficiency (DOGE) and enforced a freeze on any new regulations by bureaucrats and on Federal worker hires. In line with his America First policy, he withdrew from the Paris climate pact and the World Health Organisation and vowed to take back control of the Panama Canal.
There were no announcements on fiscal policy as this comes under the purview of the Congress.
Our interpretation
President Trump’s first day in office was consistent with his campaign promises and appealed to several high priorities for his base – controlling immigration, reducing inflation by unleashing US energy, and cutting government regulation.
Given its prominence, we believe the key implication from a macro perspective is the change to immigration policy. The hawkish stance on border controls that President Trump has adopted should significantly reduce net migration flows and be inflationary in the short term, as the inflationary shock of a reduced workforce pushing wages higher outweighs the negative demand shock. In the longer term we expect this demand shock to start to dominate as carry-over effects to the rest of the labour force lower US growth.
Meanwhile, an initially less provocative approach to trade for now bodes well for inflation risks in the very near term. This news boosted financial conditions and risk sentiment, causing both equities and bonds to rally and the dollar to weaken. However, the threat of tariffs will keep market volatility elevated while the narrative and eventual policies on trade unfold. Ultimately, the possibility of a global trade war still looms large. Monitoring any potential retaliation from other trade partners in the coming days and weeks will be critical, especially when it comes to the use of International Emergency Economic Powers Act (IEEPA) rules.
Outlook
The absence of immediate tariffs on imports from China should stir some temporary relief both within China and in other major Asian exporters while Trump’s administration reassesses trading practices and various agreements. However, the new administration is still very young and there has been no lack of intent to use tariffs as leverage for negotiations with China and the other major trading partners of the US.
We believe there is still a significant risk of increases in tariffs, especially towards China. The White House memo and TikTok extension timelines suggest that trade and tariff risks could heat up again in early April. Meanwhile, the threat of tariffs to other nations also remains on the cards, including on the EU, likely if they do not increase imports of US energy products.
In addition, immigration policy could also be made more stringent by attempting to increase deportations and further reduce migration flows. Trump indicated that active deportations and raids in major cities "will happen", without giving an explicit timeline. This keeps tail risks from further labour supply shocks elevated and creates upside inflation risks especially if the deportations include large scale internal removals.
Lastly, there could be legal challenges to these initial executive orders. A lawsuit has already been filed against the Department of government efficiency, while the removal of birthright citizenship would require a constitutional amendment with a two-thirds majority in congress. It is still early days, and we will be closely monitoring how the dust settles from these day one announcements and new policies that get unveiled.
Asset allocation views
The Solutions & Multi Asset team view remains ‘risk on’, expressed via an overweight to equities and a preference for US equities in particular. We are neutral on credit despite strong fundamentals due to the tightness of spreads. We are also neutral on government bonds in reflection of the elevated risk of inflationary pressures. Elsewhere, we retain our positive view of the US dollar. Positioning might be a headwind, however US exceptionalism looks set to continue under Donald Trump.
