U.S. ELECTIONS
Donald Trump was elected to be the next president of the United States. Republicans regained control of the Senate and appear likely to retain control of the House of Representatives.
Our Take: Equity markets soared due to the election results as traders believe a Trump administration will be good for business. The fixed income market fell dramatically as Trump campaign promises of high tariffs and increased deportations are feared to be inflationary. Much of the bond market reaction was reversed by the week’s end while equity markets held on to gains.
THE FED
As expected, the Fed cut rates by 25 basis points (bps) this week, bringing the federal funds rate to a range of 4.50%-4.75%. The move was not surprising and there was little change in the Fed’s post-meeting statement. Given the results of this week’s elections, there was significant interest in the potential impact of the next administration on the Fed and its policies during the post-meeting press conference. Fed Chairman Jerome Powell stated the election will have no effect on policy decisions in the near term. Noting that some of the president-elect’s advisers suggest the chairman should resign, Powell was asked if he would leave his position if asked by the incoming president. Powell responded with a clear and emphatic “no.” Asked if a president has the power to fire or demote him, Powell stated such action was “not permitted under the law.”
Our Take: Throughout history, various presidents and their administrations have tried to exert influence over the Fed. It is unclear if the next administration will attempt to remove Chairman Powell. What is clear is that the Fed’s independence is of vital importance to its credibility and effectiveness.
CHINA
The Chinese government unveiled a $1.4 trillion debt swap to refinance “hidden” local government debt that is preventing local governments from supporting growth. The government did not announce any type of stimulus to support consumer demand.
Our Take: Bringing the off-balance sheet local government debt into greater visibility will help to reduce uncertainty around indebtedness and is a needed step for China to revive growth. The government seems to be waiting to see what the next administration’s trade policies actually are before responding with any other measures to offset potential reductions in exports.
GERMANY
Chancellor Olaf Scholz fired Finance Minister Christian Lindner who is a member of one of the coalition parties in the current government. This effectively ended the current coalition, and Scholz indicated that there would be a confidence vote in January that would lead to early elections in March. Scholz has received significant pushback to have elections in January, especially from the Christian Democratic Union bloc, which is currently leading in polls and would likely lead the next government. The DAX equity index rallied on the news.
Our Take: The current coalition government has been paralyzed by disagreements and infighting among the different parties. Germany is facing slowing growth and changes in the global economy that will require adjustments within the German economy. The positive market reaction is likely signaling hope that elections will result in a more unified government that will have a mandate to address these issues.
BANK OF ENGLAND
The Bank of England (BOE) cut rates by 25 bps, as expected. Governor Andrew Bailey commented that the BOE is still concerned about inflation and therefore cannot cut rates “too quickly or by too much.” The pound rallied and futures markets reduced the expected number of future cuts.
Our Take: The BOE is attempting to ease in order to support growth, but the recently revealed Labour budget’s increased borrowing is seen as inflationary and reducing the room for the BOE to ease.
MUNICIPALS
Voters across the country have likely approved $52 billion of state and local measures according to Bloomberg. The two largest bond measures were $10 billion each, both from California and both of which passed. The largest bond measure to fail was a $4.4 billion referendum for the Houston Independent School District, with about 58 percent of voters rejecting the measure, which was the largest school bond proposal in state history.
Our Take: It is said that all politics is local, and nothing epitomizes that statement more than municipal bond referendums. For example, California voters will allow spending on green initiatives that would likely have failed in other parts of the country. Voters in Houston rejected funding school improvements. Reasonable people can argue over the merits of the results but there is little doubt that local control enhances accountability and responsiveness, allowing communities to make decisions that reflect their unique priorities.