The former president is set to return to the White House with a more radical plan but inherits a very different economy compared to 2016. The Senate will also be held by Republicans, and it appears that they will also have a House majority although that will be a close call and may take some time to clarify. The Trump reform agenda was also not particularly clearly defined, but here's what we think we can say so far on the general thrust of policy.
Functioning of Government
Democrats will have relatively little power to oppose Trump in Congress.
Control of the Senate brings wide-ranging advantages, including the power to appoint sympathetic judges.
The Federal cases against Trump related to January 6th and classified documents will likely be dropped. But he is still set to be sentenced in NY on 34 felony counts in two weeks.
Fiscal & Domestic Policy
With the Republicans holding at least one chamber in Congress. There is likely to be less opposition to fiscal expansion when the debt ceiling negotiations take place in January next year.
The 2017 corporate tax cuts from 28% to 21% are highly likely to be extended beyond the current end-2025 expiry date, and may even be lowered to 15% for goods and services produced in America.
Estate and income taxes for higher-income families are also likely to be cut.
Spending is likely to be cut substantially as part of the Musk "efficiency" plan and the Dept. of Education could be shut down, with responsibility returned to the states.
The Affordable Care Act is at risk of repeal, increasing healthcare costs for many Americans.
The net effect is likely to be an acceleration in the growth of the fiscal deficit.
Energy & Climate
There will likely be reduced constraints on oil & gas production and the price of fossil fuels is likely to be lower than otherwise would be the case.
It will likely be much harder to meet Paris climate targets and the US may once again withdraw from the COP.
Trade & Tariffs
The president will have some power to increase trade tariffs by executive order. But some may now be legislated.
Geopolitics
Negotiations with NATO allies are likely to cover trade, security and climate with the White House taking a more transactional approach. This implies a step away from the principles-based world order that underpinned globalisation under US leadership since World War II.
Global institutions such as the UN and IMF are likely to see their influence eroded as the US makes more decisions unilaterally.
There will be an attempt to end the war with Russia which may see Ukraine forced to cede territory and aspirations of joining NATO and the EU, unless the Europeans decide to break away from the US. President Trump will likely pressure NATO allies on defence spending and trade.
The Israeli government is likely to be emboldened and there is the risk of escalation with Iran, with other Arab states unlikely to intervene.
Global Economy
The global economic context is very different to 2016. Just over a decade ago, the economy was recovering from the financial crisis with gradual but steady momentum in jobs growth.
This time, lower-income households are suffering from higher prices and reduced living standards. There is little evidence that further tax cuts will spur employment and lead to sustainable jobs growth, although a short-term boost to "animal spirits" seems likely.
A drop in fiscal spending may lead to a reduction incomes, particularly if households see a rise in healthcare costs which could operate as a tax on lower-income households.
Tariffs would likely represent a short-term inflationary shock, followed by a drag on real spending and growth.
China has suggested that it might respond with a larger fiscal stimulus package in the coming days as a consequence of the change in US leadership.
Monetary Policy & Capital Markets
Although the FOMC is likely to cut rates by -0.25% tonight, future rate cuts could be slowed due to the inflationary shock.
Equities will benefit in the short term. But waning liquidity and other macroeconomic challenges are building.
The US dollar has strengthened in anticipation of fewer rate cuts and likely short-term equity market inflows.
Bond yields could rise substantially further if the deficit appears likely to grow much faster as the "bond vigilantes" make a comeback.
Rising bond yields pose a threat to financial stability as US banks are still carrying substantial unrealised losses on bond holdings.
Gold has sold off on dollar strength and the prospect of fewer rate cuts. But gold could perform extremely well if geopolitical tensions rise and if the Fed has to restart either the BTFP or QE.
Cryptocurrencies will likely perform well due to the prospect of more favourable government treatment.
Market
S&P500 5,929 +2.5%, Nasdaq Comp. 18,983 +3.0%, Russell 2000 (small caps) 2,393 +5.8%, S&P/ASX200 future 8,199 +2.6%,
US 2yr 4.26% +8bps, US 10yr 4.43% +16bps, US 30yr 4.60% +17bps
US dollar (DXY) index 105.13 +1.65%, AUDUSD 0.6569 -1.0%, Gold US$/oz 2,660 -3.1%
