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Joyce Chang: Welcome to Research Recap on J.P. Morgan's Making Sense podcast channel. I'm Joyce Chang, Chair of Global Research at J.P. Morgan, and today, I'm joined by my colleague Bruce Kasman, our Chief Economist and head of Global Economics Research at J.P. Morgan. And it's hard to believe it was just a week ago, but we're here to discuss the economic and geopolitical implications of the second Trump presidency. So Bruce, thank you so much for joining us.
Bruce Kasman: Thanks for having me.
Joyce Chang: Well, Bruce, Trump has built much of his campaign on a lot of promises to revitalize the U.S. economy. So now that we're looking at Trump 2.0 and he's back in the White House, what's your view on all of this? What will this mean for growth, inflation, the fiscal outlook?
Bruce Kasman: So, first of all, as you noted, there are a lot of things that were talked about in the Trump campaign. And we're still, I think, in the early stages of understanding both the timing and the magnitude which will translate into policy. I think without having clarity on that, it's very hard to do accurate forecasting. What we do know, of course, is the direction of change. We know that we're going to have some tariffs that are going to be put on and certainly intensification in trade conflicts around the world. We're going to have some tightening in immigration, how much remains to be seen. We're going to see a regulatory reset that goes along a lot of different dimensions, climate, financial, antitrust, at least those areas clearly. And we're going to have fiscal policy changes that happen here. I think for the moment what we are thinking about is a world in which the U.S. is experiencing both a negative supply shock, and by that, I mean the reduction in immigrants coming into this country. The rise in tariffs on U.S. imported goods is both a negative for growth and a positive for inflation. And at the same time, we're looking for a positive demand shock that comes from the regulatory reset and the fiscal actions. I would note that the positive demand shock is going to be in its early stages, primarily through sentiment and financial conditions improving, which is something we're already seeing. The fiscal actions take time to work through Congress. The regulatory changes take even longer time to work through even if the president does go forward quite quickly. The net effects of these in terms of growth in 2025, we think is relatively neutral based on the idea that the tariff increase is largely concentrated in China, that the fiscal policy actions are relatively limited beyond the extension of the 2017 tax cuts. And therefore, we haven't changed our GDP forecast. We have pushed up our inflation forecast modestly, and we have reduced some of our expectations about how far the Fed goes in easing. I would emphasize, and I want to make it very clear, the magnitudes of these things do matter. There is talk of much more aggressive immigration policy, removal of illegal immigrants in the country. There’s talks of much broader tariff increase against a wide range of countries, if those actions are started to be implemented, we'd have to worry that the disruptive effects of those, both in terms of retaliations abroad and also in terms of the sentiment influence, which currently we think is a positive for the U.S., could shift. And I think that does suggest that while the net effect of this will be modestly higher inflation, relatively stable U.S. growth, that the tail risk to the downside for more extreme measures shouldn't be underestimated here.
Joyce Chang: Thanks so much for that, Bruce. So we're looking at relatively stable growth in the U.S., but I want to look at the global picture. What do you think is going to happen to the rest of the world here, particularly with all of the talks about tariffs? What does this mean for international trade and what does it mean for global growth and growth outside of the United States?
Bruce Kasman: So while we think it's a relatively neutral effect on U.S. growth, we are looking to see a negative hit on the global side. The most direct side of that is the increase in tariffs that we think will be concentrated in China and will come pretty early in the year. The other side of this is the threat of a broader trade war, the concerns that U.S. policy is turning more aggressive in terms of closing up to the rest of the world more generally that we think is going to have a negative effect on sentiment. We do see offsets to that. Certainly, we expect China to respond in terms of its fiscal stance. We think there's a broader shift going on in fiscal policy around the world that's going to take hold here. And we do think, of course, the rise in the U.S. dollar is going to, in some ways, temper the negative impacts of the trade shock. But the net effect we have on the global economy is negative on growth. It's roughly neutral on inflation as they're both demand weakening effects as well as the tariffs starting to raise prices around the world. And we think overall, it's also slightly in the direction of less monetary tightening, particularly in EM economies that are going to be sensitive to uncertainty and currency movements.
Joyce Chang: Thank you so much for that, Bruce.
Bruce Kasman: Joyce, how about your perspective here? What's your view on what might be happening here as we turn to the global economy, particularly for markets as we've seen the Trump trade, so to speak, come through in equity markets and other risky assets?
Joyce Chang: I mean, you're absolutely right, Bruce. We've seen the Trump trade come through. A lot is getting priced in very quickly. I mean, if you look at the last three-month S&P 500 return, it's one of the strongest in nearly a century. And year-to-date, we're actually looking at the highest return since the elections in 1936. But, I think, as you put it, the Trump presidency, a red sweep, it's about U.S. exceptionalism. And that's going to play out on multiple channels with implications for equities, for rates, and for global FX. So let me try to unpack that a little bit. So we're looking at pro-growth policies, as you pointed out, and deregulation across industries. So for banks, industrials, transportation, energy, you got some upside there for the equity markets, but that's getting pretty quickly priced in. The market will at some point focus on the policy execution risk. Right now, what's getting priced in is deregulation. But what you're seeing are some different signals that are coming out of the rates market. We've seen a very sharp move higher in the back end of the rates curve. I mean, that's up 85 basis points since the FOMC meeting back in September. And that momentum, is one where the question the market is asking is, is there much further it could go given some of the fiscal spending that could take place? So, our rates analysts think that, we've got the Treasury auctions well covered through the end of next year. But if you look out further, you've got a really large funding gap that's going to raise the question of, do you need to raise coupons? Maybe even before the end of the year, you're going to see that question come up. On the FX side, we are looking at as you mentioned, a stronger dollar here. What is the impact from the tariffs, we think that every 10% increase in a tariff could be maybe five, even a little bit higher, depending on the fiscal deficit, 5% appreciation of the dollar here. So that's more downside for a lot of the emerging markets, currencies in particular, and for the euro, closer to parity. And we're taking a look at companies that have a lot of China revenue exposure as well. That's one thing that we looked at during the trade war. we saw that just the tariffs, which were much lower on China than what's been talked about, took about $2 off of EPS. And some of the numbers that we're running right now, when you look at the magnitude of the tariffs or applying them across all Chinese imports, I mean, you're looking at increases that could be as much as $15 EPS. So those are just some of the implications on the markets. But what's getting priced in right now is pro-growth, deregulation, and that really has fueled the equity market and the earnings have been holding up here very strongly.
Bruce Kasman: So, Joyce, we've been focused mostly in terms of trying to um understand the implications of the election from the perspective of economic policy change, but this is obviously an election which is going to shift international relations in a fairly strong way. Obviously, from the economist's point of view, one of the areas that that potentially has direct impact is on commodity prices, Middle East, Russia-Ukraine both play out in that space. But there's a far broader set of issues here. From your perspective, how would you view the shift going on in international relations, U.S. foreign policy in particular? And how does that color your views in terms of thinking about markets in the year ahead?
Joyce Chang: Well, there's a lot of focus on the U.S.-China relations and whether those tariffs are going to go in first before you talk about a universal tariffs on other countries. And I think we've seen a real redirection of trade over the last couple of years since the first set of tariffs went into place. The U.S. is much less dependent on China for its imports, but the rest of the world is doing more trade with China. And we have not seen deglobalization. We've just seen more of a shift in the trading patterns, more fragmentation, and more regionalization. So I think, the way that a lot of countries are looking at this is, what's the currency impact going to mean for them? Is it a stronger dollar? Is it weaker emerging markets FX for countries like Mexico? And then there's this whole question of not just tariffs that are bilateral, but you have third countries impacted by this. And this question is coming up for Mexico, with USMCA renegotiation coming up, and also for the ASEAN countries. So I think the focus has turned to China first, but also just any country where the U.S. is running a trade deficit. So Vietnam factors into that. And just how will the tariffs be applied this time? Because third countries were not discussed at the last round of tariffs when Trump was first in place.
Bruce Kasman: So let me just sum up from my point of view. We think that we're facing what will be a shock that will probably reverberate through the global economy. I want to emphasize as much as anything right now, it's too early to really calibrate this in terms of making confident changes in forecasts. But there is in the U.S., we think, a negative demand and supply shock hitting. In the rest of the world, we think most of what you're getting is a negative demand shock. So there's a clear rotation and growth toward the U.S. There's clearly upward pressure to some degree on U.S. prices. And what we're trying to get, I think, is a good sense of what the magnitude of this is. If it's modest, then I think the contours of what our baseline view is, which has been high for long on U.S. rates in a world in which we sustain the expansion does make sense. But there is clearly a risk here of more extreme policies and more disruptive changes in macroeconomic performance. Any last words from you, Joyce?
Joyce Chang: No, I just have to really reiterate the points that you've said, that we're kind of early stages here. So we're still waiting to hear what the outcome is for the Congress. But if you add to that a Republican Congress that can enable a domestic agenda around fiscal policy growth enhancement, some of the immigration curbs, that can have real ramifications across the global economy and really affect the emerging markets as well. So I think that China is sort of as a starting point, but then just more broadly, we have still an economy where even China with the stimulus, there are concerns about this been more of a stabilization than a stimulus package and still the downside risks from Europe. So a lot to think about, as we see how these policies will play out. Well, Bruce, this is a good place to wrap. Thank you so much for those insights. We've got to just kind of wait and see. We've got some uncertainty here on tariffs and trade in particular, what will happen with China. But the business sentiment outside of the U.S. is something that we really need to keep an eye on. Thank you so much for joining us for this episode of Making Sense and for sharing your views. And look forward to hearing more as these events play out.
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