All focus this morning is on the US presidential elections. For today's data calendar see page 3.
At the time of writing, Donald Trump seems to be the likely winner of the US Presidential Election.
The Republicans, therefore, have retained the power of both the House and the Senate, implying that it will be easier for Donald Trump to get his policies through.
The electors are due to meet in their state and vote for the President and Vice President on 19 December.Congress is due to meet in a joint session to count the electoral votes on 6 January 2017. The inauguration of the new President and Vice President is due to take place on 20 January 2017.
Overall political outlook. Based on his policy proposals, Donald Trump stands for a significant regime shift in US policy. However, we think domestic policy changes should be more modest due to likely resistance from Congress, even within the Republican Party. Still, Trump's room for manoeuvre is larger as the Republican Party will also control Congress. The biggest change lies in the foreign policy outlook as Trump represents a much more protectionist approach. Also, the US is likely to introduce much tougher lines against illegal immigration.
Overall economic outlook. In the short term, we do not expect growth to be hit by Trump uncertainties through lower confidence and hence we expect the economy to continue to grow around 2%. In the medium to long term, uncertainty is set to rise and we think the negative effects of more protectionism and tougher immigration policy will dominate the possible positive effects of less regulation, lower taxes and infrastructure spending.
Economic policy outlook. Throughout the election campaign, Trump has shifted stance and most recently he criticised the low interest rate policy. Trump has said that the Fed has created 'a false stock market' and that Yellen is 'very political' as rates are low because of Obama. We expect Trump to replace Fed Chair Janet Yellen in 2018, as she is a Democrat. Such a move is very unusual in an historical perspective. We still expect the Fed to hike in December, as we expect financial markets to recover before the December meeting and do not expect a major impact on confidence indicators in the short term. We expect the Fed to hike twice in 2017 in June and December (i.e. a total of three hikes from now until year-end 2017) to offset fiscal boost to growth in 2018.
Market reaction. Risk sentiment is suffering this morning with the big indices trading in the red - most notably US equity futures which have lost c.5% at the time of writing. USD/MXN has risen sharply on Trump's win and we think it may rise further to 21.5 over the next few days, given Mexico's large trade share with the US and Trump's sharp rhetoric. For more on Fixed Income and FX Markets seepage 2 and the link below.
To read the entire report Please click on the pdf File Below