In the US, inflation is becoming a significant issue for investors. At 2.6% in October, consumer price growth is slightly higher than the previous month (2.4%), while the underlying index, which excludes energy and food, remains around 3.3%.
Inflation is still very high, and there is every reason to believe that the Fed will have difficulty bringing it back towards its 2.0% target by the end of the year. But it is the beyond that worries investors most.
The tariffs that Donald Trump is preparing should increase consumer prices (imported products will be more expensive, and domestic production will be less competitive and should take advantage of this to improve its margins). Cheaper credit and tax relief will boost demand. At the same time, the fight against immigration and the drive to expel illegal immigrants will further tighten the labour market and push up wages – and, with them, the price of services.
Everything suggests that US inflation is set to pick up again in 2025. While there is little doubt that the Fed will further lower its key rates by 0.25% at its December meeting, conditions are not specific for a continued downward trend in 2025. Thus, a credit that will remain at sustained high levels is not to be excluded, which has somewhat dampened investors' enthusiasm.
Nevertheless, there is little doubt that Trump's measures (including tax relief) will help the US economy and the ability of US companies to generate profits, which should benefit markets.
Europe trembles at the face of Donald Trump
Europe did not expect Donald Trump's return to power and did not do much to prepare for such a scenario. It will now have to struggle to adapt to the 47th US president, for whom it counts little—an adaptation that will not be obvious.
The challenges will be many
MAGA - America first: The slogan is almost 10 years old but has been updated. Once again, Donald Trump does not care about the rest of the world and will try to strengthen American hegemony. Everything suggests that he will be more effective during this second term.
First, because he knows the workings of power better and has time to prepare, he will control Washington as few presidents before him. Republicans dominate the Senate, the Supreme Court, and, in all likelihood, the House of Representatives, which gives Trump a unique chance to get his policies approved.
He will try to establish global supremacy mainly through trade. As we know, the US consumer is one of the main drivers of the worldwide economy. When Europe, China, or Japan face timid domestic demand, the US market is a real lifeline for producers in these countries.
As a good businessman, Trump is keen to make people pay for the privilege of accessing this market and mentions high tariffs on foreign products, primarily when they will compete with US production. Those who wish to sell in the US will be asked to settle there and create jobs and wealth. Those who do not will have to cash out.
This is a significant challenge for Europe. Firstly, US tariffs will weigh on the demand for European products in the United States even though European demand is at a low ebb and the Chinese consumer is abandoning several European products (cars, luxury, etc.). The economic situation is, therefore, very difficult for European exporters, as it will weigh on activity.
Four countries will be particularly impacted: Germany, which in 2023 accounted for more than one-third of EU exports to third countries (extra-EU); Italy (almost 13%); the Netherlands (12%); and France (11%). Together, these four countries accounted for about 70% of European exports. Therefore, they will be mainly concerned by what is happening across the Atlantic.
In addition, the deregulation movement expected in the US under Trump goes against the current situation in Europe, where the authorities are imposing an increasingly crucial regulatory framework on companies. Why invest in Europe when the market is less favourable, and energy prices and taxation are much higher? Many companies are, therefore, likely to take the plunge and move to the US. With them are jobs and wealth that will leave the Old Continent in favour of the lands of America. European investment is therefore expected to be at a low level. Without it, the productivity gains Europe needs to get back on track so severely are unlikely to be achieved.
Towards a credit more expensive than expected?
Europe will also be a collateral victim of some of Trump’s policies. The government intends to lower taxes to boost its economy and fight immigration. Increased economic activity with a labour market short of workers results in significant inflationary pressures.
The Fed's room for manoeuvre to continue its policy rate cuts will likely disappear, and US interest rates may remain high in the coming years.
On the European side, we expect the European Central Bank to continue lowering its key interest rates. However, it will face two significant problems: On the one hand, the high yields offered to the US will make this country compete with Europe in the debt markets, which risks keeping European rates high and preventing them from going much lower. On the other hand, a considerable rate differential would weigh on the euro, which would suffer in addition to its economic dynamism in retreating against the United States. The euro is, therefore, likely to remain weak against the US dollar, with the associated risks for inflation. The window of opportunity currently available to the ECB to lower its key rates may disappear.
We should add that, at the budgetary level, Europe will increase the share devoted to defence. She knows that Donald Trump is not a NATO enthusiast, that his priority is to pivot towards Asia, and that Europeans will, therefore, have to contribute more to ensure their security. Otherwise, the United States will threaten to abandon them. At a time when fiscal consolidation is needed, defence spending will be reduced by funds to be spent elsewhere. European capitals are, therefore, in a delicate position.
Peace and cheap energy
If Donald Trump is worried, it must be noted that he intends to use his negotiator talents to promote peace. There is, therefore, a good chance of peace talks around Ukraine that would end this conflict. Indeed, Europe will have to take on the heavy task of getting Ukraine back on its feet. But the end of this conflict would undoubtedly be good news for our continent.
Another area on which Trump intends to weigh in is energy prices. If the US oil and gas sector has celebrated Trump’s election, it knows it will have carte blanche to produce as much as it wants (and is asked to do so). In return, Donald Trump will expect lower energy prices, partially compensating for the price increase caused by customs duties levied on imported products.
Therefore, the world should find cheaper energy to delight consumers worldwide. On the other hand, abundant and cheap hydrocarbons will make the renewable energies on which Europe is betting less competitive.
Will Europe regain its competitiveness and boost productivity with Donald Trump in power in the US? This seems significantly complicated since Washington’s enthusiasm for reducing bureaucracy contrasts with a Europe that seeks to regulate more and more and that the tax burden on US companies will be reduced.
We continue to invest in the US with all our diversified fund portfolios. However, we only invest in the euro area through individual shares.
