Fynsa
It was 1992 when James Carville, Bill Clinton's strategist, would say a phrase that would go down in the political books: America's presidential elections are all about "the economy, stupid."
Indeed, in this week's elections, nearly half of those consulted in the national exit polls indicated that "they were worse off financially than four years ago". This issue emerged as the second most commented concern by respondents, with 31% of mentions.
And of those voters who identified the economy as their top concern, an overwhelming majority went for Trump: 79% vs. 20%.
At the same time, inflation emerged as a key factor in electoral terms. More than half of those consulted - upon leaving the polling places - said that it had caused them moderate difficulties during the last year, and one out of four confessed that it had serious consequences. In the latter group, 73% said they had supported the now U.S. president-elect.
As for the results themselves, while some results are still being counted, Donald Trump has successfully regained the presidency. Republicans have also regained control of the Senate and would retain their majority in the House of Representatives.
On the economic front, the two most immediate issues now are how firmly Trump will push through his campaign promises on immigration and trade. On the former, it seems very likely that Trump will immediately end the Biden-era asylum programs and take other executive actions to suspend or ban certain types of immigration. Over time, this should return the equilibrium level of job growth to the pre-pandemic estimate of about 100,000 per month, according to estimates by J.P Morgan. The inflationary implications of this should be limited and the likelihood of large-scale deportations is not ruled out, although that is expected to occur later.
The greatest uncertainty relates to how quickly and aggressively Donald Trump will push through trade restrictions. In principle, the odds of a 10% across-the-board tariff in 2025 are low, partly for procedural reasons. China, on the other hand, is likely to face significantly higher effective tariffs. The lesson of Trump's first presidency for the United States is higher import prices, lower consumer price increases, and somewhat lower economic activity.
However, there are also positive effects on business sentiment associated with a less stringent regulatory environment and potentially lower taxes, so the outlook for business growth in 2025 has not really changed much on net, despite all the important factors.
Fiscal policy will be the focus of attention
If control of both chambers is confirmed, we are likely to see a significant tax package next year given the impending expiration of numerous individual tax provisions of the Tax Cut and Jobs Act of 2017 (TCJA). In addition, President Trump is expected to push to extend several key provisions of the TCJA, including the current marginal tax rate levels for high-income individuals. We also expect some efforts to reduce clean energy tax credits and reduce IRS enforcement. Republicans may also push to reduce corporate tax rates from the current 21%.
The wild card of fiscal policy is tariffs, toward which candidate Trump expressed great approval.. President Trump will have significant ability to implement tariffs unilaterally through executive action and it would not be surprising if his administration makes this an early priority. The details are not yet clear, but tariffs on Chinese goods and a broader trend toward a more protectionist tariff policy are anticipated If this were to materialize, domestic production would increase and we would likely see some benefits for small-cap U.S. stocks, but the resulting higher inflation levels would put upward pressure on bond yields and could slow the pace of cuts by the Federal Reserve (Fed).
Precisely, as for the Fed, the election results may have slightly reduced the likelihood of more aggressive interest rate cuts. In recent years there has been a huge growth in research on how optimal monetary policy should work in the event of greater uncertainty, including policies, which may lead the Fed to act more slowly than it otherwise would. Until December we do not see many surprises, but already looking ahead to 2025 we would expect the Fed to ease policy at a more gradual pace (likely quarterly), with the next easing in March, and would continue until the funds rate reaches 3.5% in 2026 (vs. 3.0% by the end of 2025 previously estimated).
As for the markets, during the last weeks of the election season, they began to discount a higher probability of a Donald Trump victory over Kamala Harris. The so-called "Trump Trade" (see U .S. Elections: Risks and Opportunities) triggered a rally in bond yields due to expectations that more protectionist trade and tax policies could accelerate some segments of the economy, targeting the domestic market, while at the same time increasing inflationary pressures.
As markets hate the unknown and, given that the results have been known fairly quickly, we have seen some degree of easing in the relatively high market volatility. However, we expect political trends to continue to affect the markets.
Geopolitical uncertainty and the potential for changes in fiscal policy, as well as other lingering issues, could mean continued uncertainty.
Impact on interest rates
Where the impact on interest rates has been felt the most.. Treasury yields had a fairly volatile week, with 10-year yields hitting a low of around 4.25% on Monday, only to pull back to 4.50% in reaction to the presidential election results. In fact, long-term yields rose 15 basis points and the curve steepened amid the strong performance of the Republican party.
Consequently, the change in the Fed's forecast and the outcome of the election require a change in the interest rate forecast. Clearly, a Fed that eases more slowly and adopts a higher terminal rate should translate into Treasury yields remaining higher than previously expected.
In addition, the election results should also lead to more anchored Treasury bond yields for two main reasons:
Consequently, we recommend a fixed income strategy that is still conservative in terms of duration, in order to limit the risk associated with interest rate volatility, especially in the longer part of the curve.
