- President Trump offers $2,000 tariff-funded tax cut to many Americans
- Plan comes after a rare wobbly week for the US stock market
- Plunge in University of Michigan consumer confidence survey also puts US trade policies under scrutiny
- Gold price gains and US Treasury yields rise in response to planned giveaway
“It may be a coincidence, but no sooner has the US stock market had a slightly wobbly week, and a key survey shown a sharp fall in American consumer confidence to multi-year lows and the Democrats claimed a handful of key mid-term election victories, than President Trump has started to pitch fresh, purportedly tariff-funded tax cuts for many Americans,” says AJ Bell investment director Russ Mould.
“This is at least consistent with the White House’s apparent determination to get the US economy running hot and get growth to do some of the heavy lifting when it comes to making the galloping Federal deficit more manageable, but the price reaction of gold and US Treasuries to the plan suggest they remain wary of the potential inflationary impact.
“Friday’s latest monthly release saw the University of Michigan US consumer confidence survey drop to 50.3, a figure below even the troughs witnessed during the recessions of 1980, 1982, 1990 and 2008. In the interests of balance, the US Conference Board reading is not as bleak as that, but the latest score here at the end of the month should be informative, not least as that indicator does also stand way below the peaks reached during Trump’s first presidency.
Source: LSEG Refinitiv data, University of Michigan, US Conference Board
“A steady drop in job vacancies, an upward creep in unemployment and the US government shutdown are all possible reasons why consumers are looking over their shoulders, but these are all relatively recent developments. A more likely reason for the gloom, given the steady slide in consumer confidence over the past five or six years, is inflation and increases in the cost of living.
“The headline consumer price index crept back above the US Federal Reserve’s 2% target toward the end of the last decade and then roared higher as governments and central banks applied monetary and fiscal stimulus aplenty to try and combat the economic effects of Covid-19 and lockdowns.
Source: LSEG Refinitiv data, University of Michigan, US Bureau of Labor Statistics
“The headline rate has cooled but it still stands at 3% in the USA. That is no lower than it was at the start of the year, and the second Trump presidency, and well above the Fed’s target. Moreover, the year-on-year rate does not capture the cumulative effect of inflation, which is better displayed by the consumer price index itself, which now stands 30% higher than when the University of Michigan US consumer confidence survey peaked at 101.4 in March 2018, during the second year of the first Trump presidency.
Source: LSEG Refinitiv data, University of Michigan, US Bureau of Labor Statistics
“Details of the Trump administration’s proposal for a $2,000 tax cut to boost the spending power of many Americans are yet to be made clear and will presumably need Congressional approval. In addition, some economists may view cutting taxes when inflation is sticky, economic growth solid and the Federal deficit continues to surge as unorthodox to say the least.
“It is consistent with efforts to talk down the dollar, the oil price and interest rates and cut regulation, as combined they could keep the US economy humming. If interest rates are held below the prevailing rate of nominal GDP growth that could also help to reduce the burdensome debt-to-GDP ratio too and make the $38 trillion deficit with its annual interest bill of $1.1 trillion that bit more manageable.
Source: FRED – St. Louis Federal Reserve database, US Congressional Budget Office
“But tax giveaways may not help with the deficit, especially if the tariffs hit demand for goods and therefore growth over time, as many economists still fear. Stoking demand might keep inflation sticky, too, and a fresh move in gold back toward $4,100 an ounce suggest that markets are as aware of the inflationary dangers of the Trump plan as they are its growth potential.
Source: LSEG Refinitiv data
“Bond vigilantes seem to be getting twitchy, too, judging by how US 10-year Treasury yields are refusing to go below 4%, even as the US Federal Reserve dangles the prospect of more interest rate cuts.
Source: LSEG Refinitiv data
“Negotiations to end the latest US government shutdown are a further complication here and the latest cross-party deal may only lead to an agreement that runs no further than January. US Treasury holders will be paying particular attention to how any deal addresses the vexed issue of funding the Affordable Care Act, or Obamacare, as Democrats and Republicans tussle over whether temporary tax credits for users are extended, and by what means.
“The S&P 500 may be more receptive to the possibility of a crack-up boom, if that is indeed what the Trump administration is seeking to engineer, although whether the US stock market’s relentless advance is creating a wealth effect that is sufficiently broad to counteract the damage done by inflation is questioned by the ongoing slide in US consumer confidence.”
Source: LSEG Refinitiv data
