According to Richard Franulovich and Sean Callow, Strategists at Westpac, the lack of a major surprise in the mid-term US elections limited the net market response. They see the outlook for trade policy and the Fed unchanged after the elections and major spending cuts and further tax cuts are both unlikely, while there could be some talk of an infrastructure package.
Key Quotes:
“Extending last year’s tax cuts (Tax Cuts 2.0), a key priority for Republicans is very unlikely with Democrats running the House.”
“Further deregulation in various sectors such as energy and banking will likely rely exclusively on executive order and is likely to be smaller in scale.”
“It is an open question how key fiscal deadlines will be dealt with going forward. Congress averted a government shutdown before the midterms by passing a short term funding bill that expires 8 December 2018, raising yet again the prospect of a partial shutdown then.”
“Aside from economic issues, House Democrats are sure to launch multiple select committees to investigate Trump’s finances and Russian collusion even more aggressively.“
“President Trump will still have great leeway to pursue his trade policies, with little need to consult Congress on e.g. China tariffs.”
“Congress is likely to vote on ratification of the revised NAFTA deal early next year and will need to win some Democrat support if it is to pass the House; that is no sure thing with Democrats reportedly seeking even stronger provisions to protect US labour interests.”
“The Fed will brush aside any questions of politics and will proceed with a December rate hike.”
“The US economy is in good shape; the labour market is close to full employment and inflation is near the Fed’s 2% target. The outcome of the midterm elections does not materially impact the US growth outlook either way and thus shouldn’t alter the USD’s medium term trend. Fed tightening will remain a key pillar of support for the USD going forward.”
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