Franklin Templeton "Focus on US Tax Reform and Deregulation Policies"

Franklin Templeton, a global asset management firm with assets under management (AUM) reaching $1.58 trillion, published a report on the 10th titled "Bond Market Outlook Amid Policy Changes in the Trump Administration."

Franklin Templeton analyzed that the sequence of policy measures prioritizing "tariffs" and "government efficiency" by the U.S. government is a key factor increasing market uncertainty. The report emphasized the importance of deregulation and tax cuts. It forecasted that if accommodative fiscal policies continue, the downward pressure on bond yields caused by an economic slowdown would be limited.

In the report, Franklin Templeton diagnosed that a series of policies, plans, and ideas announced by the new U.S. administration have sparked strong resistance, making it very difficult to balance macroeconomic risks. It viewed two initial policies of the Donald Trump administration as likely to cause significant market turmoil and negatively impact economic activity.

Due to tariff threats, companies may delay investments while restructuring supply chains or finding ways to absorb additional input costs. Following the "public spending and employment cuts" led by the newly established Department of Government Efficiency (DOGE), reductions in public services could directly and negatively affect overall employment.

The report analyzed that the "sequence of policy measures" by the U.S. government is a core factor increasing market uncertainty. So far, most administrative actions have focused on tariffs and government efficiency, while there has been no concrete progress regarding "deregulation" and "tax cuts," which are essential to suppress inflation and promote economic growth. As a result, uncertainty felt by households and businesses has increased, inflation remains at a high level, price pressures have not eased, and there are no positive developments related to taxes.

The report reminded that it is still early in the administration and that only about a month has passed since the Trump administration took office. Because the focus has been on cost-cutting and personnel changes across government agencies, it is difficult to simultaneously pursue deregulation policies. Although the delay in efforts toward deregulation is disappointing, the report judged that there is no doubt about the administration's commitment to deregulation. As evidence, it cited President Trump's prioritization of reducing regulatory burdens and the achievements during his first term.

Overall, the report assessed that the Trump administration is still pursuing policy changes aimed at promoting growth. It emphasized the need to closely monitor confidence indices and activity indicators due to the uncertainty risks accompanying the process of change. Although recent consumer confidence has sharply declined, raising market concerns, the Conference Board's CEO Confidence Index surged, maintaining an optimistic economic outlook.

Sonal Desai, Chief Investment Officer (CIO) of Franklin Templeton's fixed income division, said, "Overall, economic activity remains resilient, and the labor market is also in very good condition." He added, "It is reasonable to raise concerns about the side effects tariffs may have on economic growth, but these should not be exaggerated. We need to monitor the situation carefully, but it is premature to turn pessimistic."

He also forecasted, "Inflationary pressures will remain robust, and headline inflation at year-end will finish at current levels."

He expressed concern that "The Federal Reserve (Fed) has already taken a cautious stance, identifying tariffs as a potential inflation risk factor," and "Despite market expectations for two more rate cuts, the current easing cycle may have ended or is nearing its end."

Regarding this year's bond market, Franklin Templeton predicted that an economic slowdown could somewhat limit upward pressure on bond yields, but if fiscal policy maintains its current accommodative stance, the effect will not be significant. The 10-year U.S. Treasury yield is estimated to remain in the 4.75% to 5% range by year-end. If there is no progress on deregulation, yields may stay at the lower end of this band. Conversely, if the fiscal deficit expands significantly, yields could exceed 5%.

Franklin Templeton advised that despite ongoing volatility and noise surrounding the market, close attention should be paid to the progress of tax reform and deregulation, which are essential elements for restoring confidence and maintaining sustainable strong growth.