One Bank Explains What Comes Next

Here’s Citi on Trump:

Donald Trump Wins the 2016 Presidential Election, With Republicans Controlling Both House and Senate

Based on 87% of votes counted at 7:39 GMT and most states reporting, with Michigan, Wisconsin and Arizona yet to declare, Donald Trump has won with 276 electoral votes (EVs), compared to 218 EVs for Clinton. Republicans have retained their majority in the House of Representatives and Senate. This result delivers Trump and the Republican Party a rare political mandate. Trump has no experience in government, and his tenure as President will likely be marked with unconventional, and potentially erratic, policymaking that departs substantially from the political modus operandi of the past, whether Republican or Democrat. This expectation of change was a major driver of his popular appeal, but it is likely to unsettle markets.

What Happens Next?

The new president will take office on Inauguration Day – 20 January 2017.  Until then, President Obama and the current Congress will preside over what is known as the “Lame Duck” session. During this period we expect the omnibus bill to fund nondiscretionary federal spending to be passed, and to decide the fate of a few expiring tax provisions. The coming weeks will also feature announcements about nominees for key posts, such as Treasury Secretary and the Secretaries of Defense and State, all of whom must be confirmed by Congress in the new session.

Heightened US Political Risk Continues

Trump will start his Presidency with low favorability ratings and without experience of government and the negotiations with Congress that are required to see policies enacted. With a Republican sweep, President Trump would have greater scope to enact his campaign agenda of tax cuts and expansionary spending. But success is not guaranteed, given divisions even between Republicans. Fiscal hawks may balk at Trump’s deficit-enlarging proposals, while conservatives might oppose Trump’s more liberal policies such as paid family leave. President Trump likely would also find resistance from a majority Republican Congress if he pursues policies that limit international trade or sour US relations with its foreign allies, given they are in opposition to longstanding party orthodoxy.

 How Would Trump Govern? – This campaign featured limited articulation of policy proposals, and some of the ones Trump has described – such as building a wall on the Mexican border – are likely unenforceable. US presidents have the greatest impact on foreign and security policy, and trade. It is in these areas that Trump may diverge most sharply from the previous status quo.

Foreign Policy – We expect a more isolationist foreign policy with the possibility for deterioration in relationships between US and allies, particularly if Trump acts on his threat to force US allies to pay more for their own security and to withdraw the US from NATO. Confrontation with China over trade policy is possible, but tensions with Russia could decline, particularly in the event that Trump reduces or eliminates the US role in NATO. Europe is particularly exposed to Trump risk, given its longstanding security relationship with the US. He has also vowed to reverse the Iran nuclear deal, potentially a major blow to diplomacy as well as reviving the risk of an attack on Iran’s nuclear facilities.

On the Economy – Trump’s stated economic policies have centered on tax cuts for households and firms, expanded infrastructure spending, and unspecified offsets in other public spending. He advocates reduced regulation (especially for the financial and energy sectors), but more Congressional accountability and oversight of the Fed’s monetary policy decisions (likely with the imposition of a rules-based policy framework on the Fed, see here). Trump might further restrict immigration, and deport undocumented persons. His rhetoric also suggests he would aggressively try to renegotiate many existing trade agreements and challenge China on trade and currency policies, which could spark global recession-inducing trade wars.

How Much Power Will Trump Wield? – Although the US political system has embedded checks and balances (see here), there are a number of tail risks associated with a Trump Presidency. These include international trade wars that might result in higher inflation, more uncertainty, reducing consumer spending and eroding business confidence vital for boosting business investment. Mass deportations, reduced Fed independence, runaway Federal budget deficits and unmanageable debt are also notable tail risks.

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