US: Markets overestimating the impact of Trump’s fiscal stimulus on Fed’s monetary policy - Rabobank

Piotr Matys, EM FX Strategist at Rabobank, suggests that the markets could be overestimating the potential impact of Trump’s fiscal stimulus on Fed’s monetary policy.

Key Quotes

“There is still plenty of uncertainty to what extent the new president will be able to implement fiscal measures, including tax cuts (paradoxically the wealthiest tax payers could benefit the most) and substantial spending on infrastructure. The markets have not even seen concrete details apart from pre-election pledges. Further, the positive influence of the fiscal impulse on the US economy could be offset by possible trade barriers that could lead to a full scale trade wars in the worst case scenario. This could still prove an obstacle for the Fed to switch to a faster hiking gear. Essentially, the markets seem to have fairly high expectations regarding Trump’s ability to deliver on his fiscal pledges. Financing all those ambitious fiscal projects suddenly became more expensive as yields have increased sharply across the board.”

“While there are concerns that Trump’s protectionism will hurt the EMs, the reality could be different to a pre-election rhetoric. Reportedly President-elect Trump told China’s President Xi Jinping that he believes that they will have “one of the strongest relationships for both countries moving forward”.”