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US Elections: First Take

In this update, our investment team share their first take on the latest developments in the US elections, with a focus on how these results could impact monetary policy in the US, the UK, and beyond. We’ll continue to provide updates to clients as the situation evolves.

Written by Kate Forsyth

US Elections: First Take

6 November 2024


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As it stands, former President Donald Trump is returning to office, with Republicans also gaining control of the Senate. While the House outcome remains uncertain, a Republican majority is increasingly likely. Market responses have been swift, as investors anticipate that a Trump-led administration will drive higher growth, higher inflation, and potentially a stronger dollar. At the same time, Bitcoin has hit a record high as Trump has positioned himself as an ally of the US crypto industry and bitcoin is perceived as a hedge against inflation.

POTENTIAL IMPACT ON US MONETARY POLICY

Turning to monetary policy, the possibility of a more inflationary environment under Trump has led markets to rapidly revise their expectations for the Federal Reserve’s actions. The Fed’s upcoming meeting this week was initially expected to result in a modest 25-basis-point rate cut, with further cuts anticipated next year. However, with bond yields surging and inflation expectations climbing, there is a growing sense that the Fed may need to pause or reconsider the pace of these cuts. Projections that had the fed funds rate ending next year at 2.75% have now shifted up to above 3.75%, a significant recalibration in light of recent events.

GLOBAL RIPPLE EFFECTS AND THE ROLE OF THE DOLLAR

The dollar has rallied strongly as investors digest the implications of a Republican-led government, and this is creating added pressures for emerging markets that are sensitive to dollar strength. Additionally, the global bond markets, closely tied to US Treasury yields, are experiencing substantial volatility. If Treasury yields remain high, central banks around the world may be compelled to recalibrate their own policies, and this is particularly true for developed markets like the UK.

IMPLICATIONS FOR UK MONETARY POLICY

The Bank of England’s next policy decision will follow closely on the heels of the Fed’s. While a rate cut of 25 basis points had been expected, recent developments may lead the Bank to reconsider. Chancellor Rachel Reeves’s recent budget announcement has already reignited inflation concerns, prompting a bond sell-off that has drawn comparisons to the gilt crisis of 2022. With the additional upward pressure on yields from US markets, the Bank of England faces an increasingly delicate balancing act as it seeks to manage inflation without stifling growth.

In fact, the current gap between UK and German 10-year government bond yields is now at one of its widest points in decades, highlighting the unique challenges facing the UK. Any shift in the Bank of England’s rate trajectory could have material implications for markets.

BROADER MONETARY TRENDS

Looking further ahead, there is a growing consensus that developed markets, particularly the US, UK, and Europe, may see a slower descent in rates than previously anticipated. The concept of the neutral real interest rate, or R-star, is now under greater scrutiny, with new estimates suggesting that neutral rates have risen since the post-Global Financial Crisis period and could rise further. As policymakers navigate this complex environment, we anticipate that rates in developed markets will descend more gradually.

To summarise, with the election results clearly moving in favour of the Republicans, the potential impact of a Trump presidency on monetary policy, both in the US and globally, is already substantial. Hundle’s investment team is closely monitoring these shifts and will keep you updated as new information emerges.