Trump’s Win
The week just gone doesn’t get much bigger, and it’s not often that the US Federal Reserve gets pushed off centre stage, particularly when it announced another 25 basis points (0.25%) rate cut, taking the (upper band) US Federal Reserve Funds rate to 4.75%. But when you have one of the most anticipated and pivotal Presidential elections, with Donald trump returning to the White House that’s what occurred. Trump became only the second person (since Grove Cleveland) and the first in 139 years to be elected President for non-consecutive terms. The enormity of the win was highlighted by the Trump winning all of the seven battleground States in a whitewash for the Republicans.
The Election
Equally, the poor showing of the Democrats was reflected in the reduced winning margins across blue belt strongholds such as New York and Connecticut. Overall, it was an election result this is likely to see a degree of acrimonious soul searching by the Democrats. Additionally, the election also resulted in the Republicans taking a clean sweep of the government in the US, with the Senate and Congress also with a Republican majority. This provides the incoming Administration with a strong platform for change. While the inauguration is still some months away (20th January), Trump will be looking to fill key roles that will set the tone for his Presidency. In our view this will revolve around tariffs, tax cuts and immigration in the near term, with an important focus also on foreign policy as the new Administration deals with the Ukrainian war and conflict in the Middel East.
United States Federal Reserve
For the Fed, the move to reduce cash rates by a further 25 basis points now sees 75 basis points of rate cuts from its previous two meetings. We now expect that the US Federal Reserve will remain on hold at its Dec meeting and while we saw a large rally in equity markets over the week, bond markets continued to sell off, reflective of a view that inflation gains made over 2024 may dissipate under the policies of the new administration, which have the potential to be inflationary. This has resulted in a clear shift in both the number and size of further rate cuts by the US Federal Reserve in 2025.
Bond & Equity Markets
With the 10yrs bond yield still trading ~45 basis points below the cash rate and the potential that the terminal cash rate may now be ~3.75-4.0%, the potential for higher yields going forward remains. This will continue to put pressure on bond market performance that also has the potential to flow into equity markets should yield remain persistently elevated alongside a higher terminal US cash rate than previous forecasts.
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