Trump appears to be edging ahead
The presidential election remains too close to call, but Donald Trump does appear to be edging ahead in some of the key swing states. At close to 11.30pm ET, the NYT gives Trump a 91% chance of victory, expecting him to win 300 electoral college votes well above the 270 threshold, and Trump’s odds of a win on Polymarket are at 94%. Markets have already responded with the 10-year Treasury yield up to 4.42%, from 4.30% yesterday, the dollar has strengthened, particularly against the Mexican peso, and equity futures are up 1.2%.
It is still far too early to tell who will win control of Congress. The Republicans will capture control of the Senate, but the House remains a toss up and the final tally probably won’t be known for at least a week. If the House breaks for the Democrats then Trump’s ability to push through additional fiscal stimulus would be sorely constrained. Even if Republicans do hold the House, it will be hard to govern with what could be a majority in the low single digits. Moreover, as the market reaction makes clear, the bond vigilantes are stirring and the risk of an even bigger adverse reaction could intimidate the Republicans into forsaking another big package of deficit-financed tax cuts. In that scenario, we would expect them to restrict themselves to extending the original Trump tax cuts, due to expire at end-2025.
Assuming Trump does triumph, we would expect him to introduce his proposed immigration curbs and tariffs via executive action sometime in the second quarter of next year. Given the slowdown in illegal immigration over the past few months, those curbs may have a slightly smaller impact on the economy than we previously believed but, at the same time, Trump has also been doubling-down on his tariff threats recently, particularly his threats aimed at Mexico. It remains to be seen whether these tariffs (the 10% to 20% universal tariff and the 60% tariffs on China) can legally be implemented via executive action, whether Trump sees them as a negotiating tactic or a new semi-permanent revenue source, and whether any countries (Canada?) or particular goods (energy?) could be exempted. As a working assumption, we are minded to reduce our GDP growth forecast between H2 2025 and H1 2026 by roughly 1% and add 1% to our inflation forecast over the same period. We will also probably raise our fed funds rate forecast by 50bp, meaning that the low next year will become 3.50% to 3.75%. But those are best described as working assumptions and we will fine tune our forecasts as Trump firms up his policies over the coming months.