How the market will trade "Harris Economics"

Event:

On August 16, 2024, local time, current Vice President of the United States Harris announced the "Agenda to Lower Costs for American Families" and delivered a speech explaining the economic policies of the Democratic candidate "Harris-Waltz". Recent polls show that the support rate of the Democratic candidate Harris exceeds that of Trump.

Harris's economic policy focuses on anti-inflation and reducing living costs, with a potential increase in the fiscal deficit by $1.7 trillion if elected

Harris's economic policy speech focuses on reducing living costs, elaborating on taxation, housing, prices, and health insurance. In terms of housing, it proposes to provide a $25,000 subsidy for new homebuyers, build 3 million new housing units to address housing shortages, control housing rents, establish a housing fund, etc. In terms of tax reduction, it expands the scope of labor tax exemptions, reinstates the $3,000 child tax credit policy during the pandemic, and proposes a new $6,000 newborn tax credit to ensure welfare while increasing the birth rate. It sets price limits on certain drugs, reduces drug and medical insurance expenses, controls food and grocery costs administratively, and combats price gouging. According to the CBO's calculations, if the basket of plans is implemented, it may lead to an increase in the U.S. deficit by $1.7 trillion over ten years. If the temporary housing policy is made permanent, the deficit could grow to $2 trillion.

Waltz's attitude towards exports to China is more dovish, potentially reversing the pessimistic expectations caused by Trump's tariff stance

Trump's previous remarks on high tariffs on China have led to market pessimism about U.S. exports, with export-related sectors such as machinery, communication equipment, and consumer electronics experiencing significant pullbacks. Harris continues the Democratic Party's previous stance on trade policy, while Waltz is more dovish on trade with China, advocating for the normalization of trade with China and the restoration of normal tariff levels, emphasizing market fairness to lower prices and achieve anti-inflation goals. If elected, it could be very beneficial for our country's exports, potentially reversing the pessimistic expectations for our country's exports to the U.S. In terms of domestic issues in the United States, Waltz's overall attitude is relatively moderate, similar to Harris: he has proposed tax breaks and expanded social welfare policies in Minnesota, and advocated for policies such as protecting illegal immigrants, supporting the legalization of recreational marijuana, controlling firearms, and protecting abortion rights. In terms of foreign policy, his support for Ukraine and Israel is relatively high and more hawkish, with overall thinking more aligned with Harris.

Harris's policies continue the Democratic Party's fiscal policy focus on stimulating demand, addressing the "inflation" issue that voters are most concerned about, and catering to the political demands of swing states, young people, ethnic minorities, low-income voters, etc., which will have medium to long-term impacts on the debt ceiling, bipartisan games, and government leverage levels

Firstly, the newly introduced "Harris Economics" essentially continues the fiscal policy focus of the Democratic government led by Biden to drive economic growth through demand stimulation. The implementation and landing of some policies still need to pay attention to the results of the "unified government vs. lame government" formed after the election. The overall content still focuses on increasing fiscal subsidies in housing, consumption, health insurance, etc. (CBO estimates a total increase in the deficit of approximately $1.7 trillion over ten years); Furthermore, the newly introduced stimulus policy has clear objectives, focusing mainly on the issue of "inflation" that voters are most concerned about, and catering to the political demands of swing states, young people, minority groups, and low-income voters.

According to data from major polling agencies in the United States, voters are currently more concerned about inflation, which to some extent explains the lower support for Biden against the backdrop of low unemployment rates in the United States. At the same time, "Harris Economics" continues the core idea of the Biden administration's "rebuilding a better home" and structurally focuses on the core demands of voter groups such as "young, essential, low-income, minority, swing states", solidifying the Democratic Party's base while leaning towards low-income swing state voters. Thirdly, in the medium to long term, "Harris Economics" still struggles to break away from the path dependence of the US government's leverage, which may continue to raise the level of US fiscal deficits and debt pressures in the medium to long term, increasing the intensity of the two parties' game on the debt ceiling level.

The market's trading theme on "Harris Economics" may still mainly revolve around the expansion of the Fed's rate cut space, fiscal leverage supporting US bond yields, a weak US dollar, the introduction of supportive policies for new energy, new energy vehicles, and public transportation, improvement in China's export expectations, and geopolitical support for high oil prices.

1. In terms of overall policies, if Harris wins, it may ease the market's concerns about inflation risks caused by Trump's election on immigration and tariffs, increase market expectations for the magnitude and slope of Fed rate cuts, the current round of Fed rate cuts may be larger, the duration may be longer, the US dollar index may be relatively weak next year, and fiscal leverage will further raise the US government's debt deficit and thereby support the performance of long-term US bond yields;

2. In terms of industrial policies, Harris may continue the Democratic Party's industrial policy thinking, emphasizing support for new energy, new energy vehicles, climate change & ESG, and public transportation infrastructure construction, while drug price reductions, fair medical insurance policies may affect pharmaceutical companies' profits and be unfavorable to asset price performance;

3. In terms of China policy, there may be room for improvement in China's export performance, especially in exports to the US. Harris's trade policy towards China is basically in line with the current Democratic government's main tone, while Walz is generally dovish on trade issues with China. If Harris is elected, the previously concerning Trump tariff issues and tension may marginally ease, and there may be short-term rebound opportunities for asset prices in key export industries after the release of short-term tension;

4. In terms of geopolitics, if Harris is elected, the Russia-Ukraine conflict may continue, the Iran-Israel conflict may not end, and geopolitical factors may still motivate OPEC+ to support oil prices and raise the lower limit of oil price volatility.

In addition, trading around "Harris Economics" will increase market expectations for Fed rate cuts, improve financial conditions, lower real interest rates, and the temporary weakness of the US dollar may be positive for the performance of commodities such as gold, copper, and other non-ferrous sectors The market from September to the fourth quarter may see a mix of the Fed's interest rate cuts, Harris' and Trump's trade negotiations, which may have different or even opposite effects on different asset classes, amplifying price fluctuations in assets.

The main focus of future market trading will still be on the Federal Reserve monetary policy meetings, Bank of Japan monetary policy meetings, and key time points for the U.S. election: pay attention to the Democratic National Convention from August 19th to 22nd, the Jackson Hole Global Central Bank Meeting and Powell's speech on August 23rd, the presidential candidate debate on September 10th, the Federal Reserve monetary policy meeting on September 18th, the vice presidential candidate debate on October 1st, as well as the fiscal and trade policy directions that the two parties may introduce subsequently.

Source: CITIC Securities Research