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Financial Turbulence in Trump’s Second Term
Last updated on July 3rd 2025
As we progress through Donald Trump’s second term, the financial markets seem to be having a bit of a rocky ride. Initially, there was much excitement when he announced his high “reciprocal” tariffs, only for a wave of relief to follow when he decided to pause most of them. Investors are on edge, fearing that these tariffs could drive inflation and stunt economic growth.
Though the labour market remains vigorous for now, strains are beginning to show. Inflation remains moderate, allowing real incomes some room to rise. However, GDP took a tumble in the first quarter, but this was somewhat muddled by a flurry of imports meant to outpace the impending tariffs. There’s talk of weakening retail sales, and housing starts have plummeted to a low not seen since mid-2020. What’s more, a crackdown on immigration is starting to tighten the labour supply.
Inflation Concerns
Core consumer prices, % increase on a year earlier
While Mr. Trump’s tariffs are widely expected to push prices up, the impact has been modest for now. By May, inflation had eased to 2.4% from January’s 3%. However, with some items facing tariffs as steep as 141%, a rise in inflation seems inevitable. Especially vulnerable categories include appliances, electronics, and military uniforms.
Stock Market Reactions
S&P 500, Jan 20th 2025=100
Investors initially cheered Mr. Trump’s return, but the announcement of “Liberation Day” tariffs on April 2nd led to a sharp dip in stock prices. A partial rollback of these levies offered some respite, pushing prices to just above their election day levels.
Exchange Rate Dynamics
US dollar trade-weighted exchange rate, Jan 20th 2025=100
The US dollar has been on a downward slide since March, driven by fears of tariff-induced economic slowdown. The “Liberation Day” announcement in April added to the decline, although there was some recovery later in the month. From mid-May, the dollar continued its descent amidst speculation about a new Federal Reserve chair favouring lower interest rates. Concerns over rising government debt have also played a significant role. Meanwhile, the euro has appreciated, thanks in part to Europe’s commitment to increasing defence spending.
Bond Market Movements
US ten-year government-bond yields, %
Since Mr. Trump’s election win, ten-year Treasury bond yields have seen fluctuations. They rose after election day but dipped from mid-January as investors anticipated looser monetary policy. However, yields spiked amid concerns over the president’s fiscal strategies before dipping slightly again.
Cryptocurrencies on the Rise
Against the dollar, Jan 20th 2025=100, log scale
Cryptocurrencies looked set to flourish during Trump’s administration. He declared that America would become “the Bitcoin superpower of the world.” In March, a strategic bitcoin reserve was established. Though bitcoin prices initially fell after the tariff news in April, they surged to record highs following a trade truce with China on May 12th. Prices remain above where they stood when Mr. Trump took office.
GDP and Economic Growth
% change on a year earlier
The latest figures reveal a 0.5% annualised contraction in GDP for the first quarter of 2025, the first decline in three years. This reflects a pre-tariff surge in imported goods, which temporarily boosted consumption and inventories. Ideally, these should offset each other, but measurement issues might have muddled the immediate results.
Labour Market Updates
The unemployment rate fell in January, as hiring remained strong and wages rose. But since then, job growth has tapered, causing a slight uptick in unemployment rates. Manufacturing, among other sectors, has seen some job cuts. Notably, the federal government trimmed 22,000 positions in May as part of an efficiency drive. Despite this, unemployment remains relatively low.
Sources: LSEG; FRED; The Economist
