12/02/2024

The week's most significant event may have been the new tariff threat Trump directed at his northern and southern neighbors through his social media accounts. Specifically, the president-elect assured that he would impose additional tariffs on China, Mexico and Canada. For China, he promised an additional 10% tariff, while he threatened Mexico and Canada with a 25% tariff on all imports. As justification, Trump pointed to the influx of drugs and migrants from these countries.

While the imposition of tariffs on China seems more than likely, the threats to neighboring countries appear to follow the strategy Trump deployed during his previous term, and are likely just a means to gain leverage in immigration negotiations, which will undoubtedly arise once the new occupant of the White House takes office.

For example, on May 31, 2019, then-President Trump threatened to impose tariffs on Mexico that would gradually increase to 25%, to be lifted only if Mexico took effective action to curb illegal immigration. The tariff threat was withdrawn a week later when Mexico agreed to help stem the flow of migrants. Thus, we do not expect these measures to ultimately be enforced. The new president-elect's appointments also continued during the past week. Some of Trump's proposed appointments have been controversial, such as Pete Hegseth for the Department of Defense and Robert Kennedy Jr. for the Department of Health and Human Services. However, the nominations for critical economic positions have been better received, with Scott Bessent's appointment as the new Secretary of the Treasury standing out as a much more orthodox choice than many had feared. Trump has also nominated Howard Lutnick to lead the Department of Commerce. While Lutnick supports the tariff agenda, he has a more moderate profile compared to other candidates who were considered for the role. The market reacted with relief following the announcement of these appointments.

In summary, since his election victory, the president-elect has wasted no time in accelerating the formation of his cabinet, giving the market a preview of the policies he plans to implement. It is clear that Trump has a well-designed economic and political plan in mind. However, the composition of his team suggests a pragmatic approach, indicating that the policies adopted by the new administration could be far less radical than those promised during the campaign.

To find the other focal point of political interest from the past week, one must look across the Atlantic to France and its parliamentary instability. Specifically, the main issue is the 2025 budget, which is unlikely to be approved unless the government invokes Article 49.3 of the French Constitution. This article grants broad powers to the prime minister, provided he can survive a combined confidence vote and a censure motion in Parliament. In this case, the no-confidence motion is likely to receive support from the left. If the National Rally party joins the left and supports the motion, the French government would face collapse.

In this regard, Marine Le Pen’s party has expressed its intention to vote in favor of the no-confidence motion, arguing that the government has disregarded its red lines and fiscal proposals in the budget. Prime Minister Barnier’s offer to eliminate the proposed increase in electricity prices, one of National Rally’s red lines, was deemed insufficient.

However, it is unlikely that Le Pen has much to gain from bringing down the government at this time, as no new legislative elections can be held until next year. Such a move would create political instability at a time when the far-right party is working to build an image of institutional strength ahead of the 2027 presidential elections. In light of all this, and although the risk of the no-confidence motion succeeding is very high, a compromise on the budget might ultimately be reached. In the macroeconomic sphere, recent U.S. data were mixed but generally reinforced expectations of a gradual economic slowdown in the fourth quarter of 2024. Meanwhile, data this week confirmed that the eurozone economy will remain stagnant through the end of the year. Germany’s IFO survey deteriorated further, and the European Commission’s Economic Sentiment Indicator remained well below its long-term average. Additionally, retail sales in Germany and France fell sharply. Overall, the prolonged weakness in the manufacturing sector is spreading to the services sector, amid rising trade tensions and political uncertainty.

Finally, headline inflation in the eurozone rose to 2.3% year-on-year in November, in line with expectations, mainly due to unfavorable base effects in the energy component. The CPI figure reinforces expectations of a 25-basis-point rate cut by the ECB at its December meeting.

We hope this podcast has been of interest to you and you will be back in future episodes.