Weekly focus: Bracing for trade war(s)

Danske Research Team Danske Bank A/S

Markets continued to digest the Trump victory in the US election this week. US bond yields continued higher, and the USD index strengthened to new highs now being up more than 6% since late September. However, US stocks were reversing some of the postelection gains. In commodity markets especially metal prices has taken a hit moving in tandem with Chinese equities as a trade war could provide a new hit to the Chinese economy. Oil prices were also slightly lower. Initial reports indicate that Trump plans to repeal the IRA tax credits for EV purchases of USD7,500, apparently supported by Tesla.

Anxiety over new trade (and tech) wars was not calmed after Trump revealed his picks for key foreign policy positions this week. They are all stern China hawks warning of more stormy waters in US-China relations. They have generally also expressed a tough stance towards Europe. The nominee for Defence Secretary, Pete Hegseth, wrote in a book in 2024: "Outdated, outgunned, invaded, and impotent. Why should America, the European 'emergency contact number' for the past century, listen to self-righteous and impotent nations asking us to honor outdated and one-sided defense arrangements they no longer live up to?". On the trade front French President Emmanuel Macron warned this week that “We are very clearly entering a world of tariff wars” and that Trump could be out to “force the Europeans to separate faster from China” by threatening duties against Europe if it keeps trading with Beijing. A lot of questions remain but policy makers in both EU and China are preparing for new disruptions in global affairs including trade.

On the data front the main tier-1 data this week was US CPI inflation. It was broadly as expected with focus being on core CPI which was unchanged at 3.3% y/y. The details were to the soft side, though, and point to continued deceleration in inflation pressures. US small business confidence increased in October, albeit from a low level. It will likely rise further after Trump winning the US election – at least if his victory in 2016 is any guide.

Euro activity data is still a mixed bag. Industrial production for September was soft but on a smoothed basis at least the decline is smaller than seen last year. Employment continued to show gains with a rise of 0.2% m/m and last week data showed signs of a pick-up in consumer spending. It fits with our outlook for a moderate improvement in euro consumption growth on the back of a strong labour market and decent real wage gains over the past year. In coming months, we may also see frontloading of imports in the US and Europe as importers anticipate tariff increases coming soon after Trump’s victory. That could spur a temporary rise in production and inventory build-up in warehouses in the US and Europe. It could also drive a short-term lift in PMI data towards year-end.

The Chinese monthly batch of data for October showed tentative signs of improvement following the September announcements of stimulus. Retail sales increased from 3.2% y/y to 4.8% y/y and house price declines faded after signs of improving demand.

Focus the coming week turns to Flash PMIs in the US and Europe. We look for another small lift in euro PMI manufacturing, albeit still from a low level. We also get euro negotiated wages, US housing data and regional surveys and CPI in UK and Japan. Also look out for potential Trump nominees for Treasury Secretary and Trade Representative.

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Danske Research Team

Danske Bank A/S

Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.

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