US elections – Red wave
In US, elections ended with a strong victory of the Republican party. President Trump was elected with a 312-226 majority in the electoral vote, and even an uncommon 3% margin in the popular vote. The Senate turned Republican as expected, while counting for the House is still ongoing but it is likely to end up Red. A strong political mandate means the new administration will have a clear mandate to deliver its platform, particularly on fiscal policy, which requires legislative action by the Houses. Tax cuts within jobs act and the corporate profits framework are thus likely to be the immediate focus. Tariffs uncertainty will remain high as trade policy is set by the administration and remains unclear how much of the electoral campaign proposals will be implemented. The new administration takes office on January 20, and key in the next few weeks will be the discussion about key appointments (Secretary of State, Treasury, Trade).
Fiscal – The new game in town
The Republican wave in US triggers global concerns about fiscal policy. Given the electoral campaign platform, US spending is unlikely to be cut while taxes will move lower. The outlook will be concerning for global investors as starting points for deficits are high, with 7% of GDP in 2023. The US curve moved higher into elections, but the shape remains flat, with 10y yielding only 15bp above 2y, despite sustained Treasury issuance. Global fiscal policy is also on a loosening path. In China, stimulus is slowly ramping up, and in Germany new elections mean more spending is likely. In emerging markets, investors have started punishing looser government policies this year. We suspect the same may start happening in developed markets and see duration at risk as a result of this new trend.
Fed – Uncertain territory
The Federal Reserve cut policy rates by 25bp to 450-4.75% at its November meeting. The tone was not as hawkish as some observers feared, and Powell defended the disinflation process and described policy as “restrictive”, hence headed to a lower level of neutral rates. However, guidance was more uncertainty than usual. The December meeting seemed far from a done deal and there was little forward guidance on 2025. As many Republican policies are inflationary (trade, immigration, fiscal) and the economy keeps giving solid signs we do see upside risks to the almost 100bp of cuts priced by markets on the US curve.
Algebris Investments’ Global Credit Team
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