28 Sep Trump Election

Trump Wins Presidency

Contrary to most polls and predictions by political experts, Donald Trump was elected the 45th president of the United States with an Electoral College victory over Hilary Clinton, who won the popular vote. Republicans also maintained control of both houses of congress and will have the ability to implement significant policy changes, although Trump’s stated policy goals do not always align with more traditional Republican goals.

Inflationary Expectations

After an overnight risk‐off move due to overseas disbelief at the election result, U.S. equity markets rose over 1%, 10‐year Treasury yields rose 20 bps and the Treasury yield curve steepened significantly. These initial market reactions indicate a recalibration of expectations towards faster growth and higher inflation and interest rates due to the shift to Trump’s stated policy preferences from his campaign.

What Now?

Trump was a very unconventional candidate, and his campaign pushed for a wide variety of policy changes. It is unclear the extent to which some of the more unusual of these policy changes will be actual priorities for his administration or just campaign rhetoric to pick up votes from disaffected blue collar workers. Taking the campaign at face value, some policy proposals such as tax cuts and reduced regulation would be pro‐growth and support faster growth, while the more isolationist and protectionist proposals would be anti‐growth and potentially inflationary. The initial market reaction seems to be giving some weight to the implementation and likely effects of all of these policy shifts.

Over the longer term markets will move based on which policy shifts are actually implemented. While tax cuts can have some positive effect and less regulation could have an even bigger positive effect and increased tariffs and restrictions on immigration could have negative and inflationary effects, the impact of these changes must also be considered against the backdrop of Chinese debt growth, the long‐term fiscal trajectory of the United States and the need for central banks to unwind their extraordinary and market distorting policies in place since the financial crisis.