US Presidential Elections: Goodbye “Blue Wave,” Shattered Fiscal Dreams

History seems to repeat itself. After the 2000 elections, the final decision could still fall into the hands of the Supreme Court. As he could have been embroiled in a close race, Donald J. Trump did not accept the potential defeat and attacks the bottom line in as many different forums and ways as possible, sometimes with quite a smile.

Markets saw this as the worst result as it could lead to uncertainty and volatility that could last for weeks.

Compared to that, what happened? The same old thing: markets end up focusing only on the positive. But let’s start with the facts first. There is no official presidential election result yet, while one thing can almost certainly be ruled out: there will be no “blue wave.” This is because the Republicans most likely kept their majority in the Senate, which is the upper house of the legislature, while the Democrats (albeit with a narrower majority) maintained control in the lower house, that is , The House of Representatives. All this means that the the legislation will remain divided for at least another two years and the Democratic president will be forced to back down on his campaign promises. Translated into the language of economic policy: Market participants can forgo the $ 3.4 trillion fiscal stimulus package provided by Democrats, or 16 percent of GDP, and much more, of course.

Of course, all is not lost. Republicans, after the expected legal duke and possible defeat, are unlikely to treat the political opponent and his bills with a gloved hand. I believe that at the cost of commitments, but with a stimulus of approximately $ 1 billion, we can still count on early 2021. However, other proposals, including health transformation, will remain in the air. Especially so The Republican majority Senate is unlikely to pass tax collection proposals that fund these programs for Democrats. And a large-scale structural (that is, permanent) increase in the budget deficit does not really fit the economic policy direction of the political force that it gives the new president.

From this, it is already clear why the stock exchanges were happy with this result. The drastic tax increases expected in the “blue wave” are lagging behind.

In addition, it will be much more difficult to tighten regulation of the financial sector, the health sector, large technology companies and the real estate market. All of these were some of Biden’s promises, but with an upper house led by Republican MPs, such a shift in the markets is almost inconceivable.

A more moderate fiscal stimulus is also good news for debt financing. Perhaps this is an area where it can be seen clearly even now in this chaos. There is great uncertainty about what will happen to trade relations or climate policy, but the lack of a huge fiscal stimulus and rising debt will overshadow all other factors in the bond markets. In short, dreams of rapidly rising inflation (and thus a rising performance environment) have been shattered. This is well reflected in the performance of US 10-year bond yields: the day before the election, it was still close to 0.90 percent, just 0.76 percent at the time the article was written.

In the short term, I believe that due to legal battles, uncertainty, and the postponement of budget intervention, ten-year yields could fall, roughly to the range that they fluctuated in the months leading up to the elections. However, bond yields may stay away from the all-time low seen in early August. The reason is that

The American economy, despite the second wave, does not have as bad a skin as the European countries.

Furthermore, market participants remain optimistic that the vaccine will be available in early 2021 and that economic life will return to normal rather slowly.

In the case of even longer yields, such as the 30-year bond, we have seen a similar move, that is, the rapid economic recovery has been discounted even over the long term. At the same time The Fed’s sustained commitment to a low interest rate environment will continue to generate very long-term inflation expectations. Furthermore, the uncertainty of monetary policy could be greatly reduced if Joe Biden finally formally assumes the presidency. Jerome Powell’s term expires in 2022 and the new presidency of Donald Trump could have brought in a new Fed chairman, presumably loyal to Trump. This is expected to undermine confidence in the independence of the US Federal Reserve, so the election of Biden could have a calming effect on markets in this regard as well.

Looking at the outlook for the dollar, if we now ignore short-term volatility, BA mix of the iden presidency and a Republican-led Senate still projects the possibility of a weaker dollar in 2021 than today. This is because, although a smaller tax package is looming, it is yet to come. The probability of substantial tax increases is quite low, which tends to increase the appetite for risk in the market, thus weakening the dollar. In addition, the trade war is also expected to end, which will also favor emerging market assets against the dollar, which is considered a safe haven. Last but not least, with its new inflation targeting system, the Fed may be more compelling in the long run than the ECB, which is why the dollar is also expected to weaken due to the monetary policy relationship. According to these, the euro / dollar cross could rise to 1.25 by the end of 2021.

All this can also have a positive effect on the regional foreign exchange market, that is, in 2021 the global pressure on the forint may decrease permanently. The decrease in domestic inflationary pressure and the growing appetite for international risk may again open the way for Magyar Nemzeti Bank to adopt a bolder and more stimulating monetary policy. At the same time, internal actors and factors may reappear as the main drivers of the exchange rate.

This article reflects the views of the author and does not necessarily reflect the views of the Portfolio Editorial Committee.

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