What impact will the "Republican sweep" bring?

Recently, the sharp rebound of U.S. bonds and the U.S. dollar indicates that the global market is beginning to prepare for a "Republican sweep". One favorable evidence is that Trump's national poll ratings and the ratings in seven key swing states have all increased (Note: Different polling organizations have different sample sizes and methods, see the report "Why are U.S. election polls always inaccurate?"). Looking at the control of the House and Senate, although the control of the House is still uncertain, the Republicans almost have the Senate in the bag.

After the 2016 election results were announced, predictions of an economic disaster if Trump won were proven wrong, and the U.S. stock market reversed direction significantly higher on the second day after the sharp drop on election day. During Trump's first term, Republicans pushed for large-scale corporate tax cuts, but at the same time, the average tariff rate doubled to 3%. In terms of foreign policy, Trump brokered the "Abraham Accords", advancing the normalization of relations between Israel and Gulf countries such as the UAE and Bahrain, and attempted to cut off funding for Iran's proxy and military projects.

If the result of the 2024 election ends up being a "Republican sweep", what impact will it have?

1. U.S. Economy

Unified control of both houses of Congress means that the Trump administration's policy intentions can be smoothly implemented, with a focus on economic policies that are of high interest to voters taking priority. Trump's economic policy tendencies can be summarized as "low interest rates, low tax rates, high tariffs", but it is also an "impossible triangle". Because low tax rates stimulate economic activity from the demand side, while high tariffs push up supply costs, both will lead to higher inflation levels; and higher inflation levels require higher interest rates to suppress, which contradicts the policy tendency of low interest rates and fiscal expansion.

Therefore, even with a "Republican sweep", the Trump administration will need to make trade-offs between the three policy tools of monetary (low interest rates), fiscal (low tax rates), and trade (high tariffs) - either strengthen two and weaken one, or have a priority order in implementation. Just like after the "Republican sweep" in 2016, the Trump administration first pushed through a massive tax cut bill prioritizing domestic issues in 2017, then started imposing steel, aluminum, and Chinese goods tariffs in the first half of 2018, and finally forced the Fed to stop tightening at the end of 2018.

It is particularly worth noting the impact of raising tariffs on the U.S. economy. According to the report "Economic Impact of Section 232 and 301 Tariffs on U.S. Industries" by the U.S. International Trade Commission, tariffs imposed under Section 301 are fully borne by importers, and for every one percentage point increase in tariffs, the import volume and value of the taxed goods decrease by about two percentage points From 2018 to 2021, the annual output value of U.S. domestic industries protected by Section 301 increased by 0.4% on average, with 0.2% attributed to rising product prices. In 2021, the output growth rates of the top ten industries benefiting most from tariff protection ranged from 1.2% to 7.5%. The extent to which Section 301 tariffs benefit U.S. domestic industries depends on the tariff rates of imported goods and their substitutability.

However, raising tariffs also burdens downstream industries. Taking steel and aluminum under Section 232 as an example, imposing tariffs has raised production costs. While the price increase in steel and aluminum brought an additional $2.8 billion in revenue to U.S. domestic producers, it caused a $3.4 billion loss to downstream manufacturing industries, resulting in an annual net economic loss of $600 million due to the tariffs.

2 Main Assets (USD, U.S. Stocks, U.S. Bonds, A-shares)

After President Trump was elected in 2016, the U.S. dollar index initially rose by 5.6%, but later declined during the tax cuts and rate hikes. Escalating trade tensions between China and the U.S. and risk aversion during the pandemic led to a rebound in the U.S. dollar index, although the overall trend remained downward. During Trump's first term, the U.S. dollar index fell by 10.3%, while the RMB appreciated by 6.3% against the USD.

If Trump is re-elected, the U.S. dollar may face a similar situation. Initially, economic growth from extending tax cuts may strengthen the dollar, but tariffs to offset the fiscal deficit could lead to stagflation, further increasing the fiscal deficit and debt ceiling, weakening the dollar's credit. Both factors could counter the dollar's strength. If the Fed is forced to cut interest rates under pressure, it could further weaken the dollar.

Historically, a "Republican sweep" has had a positive impact on U.S. stocks. Considering that in Trump's first year in office, the IT sector performed well and his relationship with Silicon Valley was closer, the notion of "Trump bearish on tech stocks" is unfounded. Trump's protectionist tendencies, tax incentives, and relaxed financial regulations have generally been favorable for the stock market.

Under a "Republican sweep," the yield curve of U.S. bonds may steepen. Trump's tax cuts and tariff policies will raise inflation, making it difficult for long-term interest rates on U.S. bonds to fall. His inclination towards low interest rates may force the Fed to consider political pressure to raise rates again. Therefore, compared to the previous prolonged inversion of the yield curve, a "Republican sweep" under Trump may steepen the yield curve Trump's policy is based on "America First", not just targeting China, but extending to non-American countries as well, such as imposing a 10% comprehensive tariff and a 20% re-export tariff. For China, which has higher production efficiency, this may not be a bad thing. Emphasizing America First will harm the interests of allies, benefit China in improving trade relations with Europe, Japan, and South Korea, and ease trade tensions with non-American countries in "new three items" and automobile exports.

Although trade restriction policies are unpredictable and may impact the short-term risk appetite of the A-share market, looking at the performance of A-shares during Trump's first term (2017 to 2020), only in 2018 did continuous declines occur due to trade frictions and destocking, with increases in other times.

3 Bitcoin

In 2021, when Trump accepted a phone interview with Fox News, he publicly expressed doubts about Bitcoin, calling it a "scam" and emphasizing his hope that "the dollar continues to be the dominant global currency, while Bitcoin may compete with the dollar." However, at the 2024 Bitcoin conference in Nashville, Trump changed his attitude, stating his commitment to making the United States the "capital of cryptocurrency" and a "superpower of Bitcoin" globally, and pledged to maintain the existing Bitcoin reserves of the U.S. government as the basis for establishing a strategic national Bitcoin stockpile.

In his policy agenda Agenda 47, Trump proposed to lift the Democratic Party's illegal and anti-American restrictions on the cryptocurrency industry, protect the freedom of Bitcoin mining, ensure all American citizens' sovereignty over their digital assets, and freedom to transact outside government surveillance. Trump's change in attitude towards Bitcoin reflects a directional shift in his policy trajectory in the "pan-technology field".

4 Semiconductors

Unlike his laissez-faire attitude towards Bitcoin, Trump is more concerned about the independence of the U.S. semiconductor supply chain, with a policy stance of "ensuring America's long-term leadership in the semiconductor field". Due to concerns about excessive reliance on the Asian semiconductor supply chain, the Trump administration collaborated with semiconductor giants such as Intel and TSMC to establish new chip fabs in the U.S.

During Trump's first term, the U.S. implemented controls on semiconductor technology exports and imposed restrictions on chip exports in 2019. In 2020, the U.S. Department of Commerce implemented new semiconductor restrictions under the foreign-produced direct product rule, limiting U.S. companies from exporting semiconductor manufacturing equipment and core components.

If Trump is re-elected, it is expected that he will continue to implement controls on semiconductor technology exports and take more "economically feasible" measures to promote the reshoring of semiconductor manufacturing to the U.S. The Biden administration signed the "CHIPS Act" in 2022, with most of the $39 billion incentive measures allocated to specific companies and projects, mainly flowing to Arizona, one of the key swing states If Trump is elected, there is a high probability that he will continue to subsidize domestic semiconductor manufacturing companies in the United States.

5 New Energy

In the energy sector, Trump is essentially a pragmatist, emphasizing energy independence and lower energy prices. In addition to continuing to support the development of fossil fuels, his attitude towards new energy is: supporting all market-oriented energy developments including coal, oil, natural gas, nuclear power, and hydropower without sacrificing the development of other energy sources. Trump holds a positive attitude towards nuclear power development, but has reservations about wind and solar energy, believing that their output efficiency is not high, and has announced that he will stop the progress of offshore wind power projects once elected.

For traditional energy, Trump's goal is to enhance America's energy independence and strive to lower energy prices below the lowest level set during his first term. He has stated that he will revoke the Biden administration's extension policy on federal land oil and gas exploration permits and leases, eliminate unreasonable restrictions on the oil, natural gas, and coal markets, simplify approval processes to accelerate their construction progress, especially for natural gas pipeline projects, thereby increasing oil and natural gas production.

The possibility of Trump completely abolishing the Inflation Reduction Act (IRA) after being elected is relatively low. Since the Inflation Reduction Act (IRA) was passed in August 2022, approximately $114 billion in U.S. clean technology manufacturing investments have been announced in 29 states, with the majority of investments flowing to red states and swing states, with Georgia leading in clean technology manufacturing investments among all states. However, Trump is likely to cancel subsidies related to electric vehicles, such as the clean vehicle tax credit program. At the same time, he may also repeal the Biden administration's mandatory measures and regulations related to electric vehicles, such as vehicle tailpipe emission standards.

Article Author: Song Xuetao S1110517090003, Source: Xuetao Macro Notes, Original Title: "What Impact Will a 'Republican Sweep' Bring? (TF Securities Macro Song Xuetao)", with some deletions made