After Trump's Victory: The Known and the Unknown

A plot that is confusing and full of twists, yet the final outcome is abrupt. This may be the biggest characteristic of this year's U.S. election. What was expected to be an intensely contested campaign, possibly extending into January next year, has essentially lost its suspense by noon today. Along with the presidential election, the Senate has also been settled, with the Republican Party successfully taking control as expected.

Of course, after "finishing the drama," what is more worth paying attention to are the issues that remain "to be continued" after the election: First and foremost is the ownership of the other half of Congress, the House of Representatives, which will directly impact the process of re-inflation in the U.S. and the external environment China will face next year. Another issue is Trump's true policy demands; we still believe that Trump's policy layout during his new term will differ from his campaign rhetoric, and we should seize the time window after the election for presidential speeches and personnel nominations to capture clues.

Trump has almost "won big" in the swing states. As of 3:40 PM on November 6, Trump has already won Georgia, North Carolina, and Pennsylvania among the seven major swing states, with a clear advantage in the other four swing states, which basically ensures he secures the 270 electoral "tickets" to enter the White House. On one hand, this reflects the structural bias present in many current election polls; on the other hand, it indeed reflects the dissatisfaction of the grassroots population in the Midwest regarding the economic situation, with economy (employment and inflation) and immigration being unavoidable topics.

The suspense of Congress, the space for policy.

The Senate results came first, with the Republican Party securing more than half of the seats, as expected.

The House of Representatives remains undecided; as of 4:40 PM Beijing time on November 6, the current situation for the 435 seats is: Democratic Party 175 seats + Republican Party 194 seats + 66 seats with results pending. Polymarket shows a 90% probability that the Republican Party will win the House of Representatives.

The ownership of the House of Representatives will have a decisive impact on the fiscal outlook for the U.S. in 2025.

1. Pay attention to the debt ceiling issue. In June 2023, Congress approved the suspension of the federal government's statutory debt ceiling until January 1, 2025, which is one of the important reasons for the continued growth of federal debt this year and the ability of U.S. finances to support the economy.

When the suspension of the debt ceiling expires on January 2, 2025, the Treasury will initiate "extraordinary measures," and both houses of Congress will begin a new round of negotiations. During the negotiation period, fiscal expansion will not be possible. If Congress is unified, the negotiation process may be smoother, and a new debt ceiling bill could be seen in the first half of the year. However, if Congress is divided, the negotiation process for the debt ceiling is expected to be more difficult, potentially leading to a significant decline in U.S. finances next year 2. Continuation of the Tax Reduction Act. Trump's Tax Cuts and Jobs Act (TCJA) of 2017 significantly reduced corporate and individual income taxes, with many provisions of this tax law set to expire in 2025. The control of Congress will determine whether these tax reduction policies can continue, thereby affecting residents' disposable income and corporate profitability.

In addition, the control of the House of Representatives may influence the policy implementation order of the new government over the next four years. In the case of a "Republican sweep," the White House's focus may initially shift to domestic affairs in the United States.

What to pay attention to next? For Trump's policies, we follow two lines of thought: what is said after the election is more important than what is said before the election; actions are more important than words.

First, pay attention to the victory speech and policy declaration of the new president, which may provide clues about the policy order for 2025, with executive orders on immigration and other matters likely to take priority.

Second, pay attention to the personnel arrangements of the new government. Trump and his transition team may gradually announce candidates for the new cabinet in November and December, with oaths of office taking place in February and March after Senate approval. Key positions to watch include Secretary of the Treasury and Trade Representative. (Refer to the report "Trump's Cabinet: 2.0 Observation Guide")

Third, pay attention to the Federal Reserve's policy outlook. During Trump's first term, he frequently intervened verbally with the Federal Reserve, and in 2018-2019, he called out to the Fed; similar verbal interventions may be repeated next year. Additionally, Trump may intervene through a "shadow Federal Reserve," for example, nominating a successor to Powell before his term expires in May 2026, thereby reducing market focus on Powell.

For the market, after the short-term impact of Trump, the Trump trade needs to be considered in the long term. Since October, the price movements of many assets have closely resembled those of Q4 2016. Now that Trump has returned, will the market really repeat the subsequent mistakes? We think it may not necessarily be the case; on one hand, the market's expectations and pricing have been quite sufficient, and on the other hand, current U.S. Treasury bonds and commodities may have expectations that deviate from reality. We expect that after this week's Federal Reserve meeting, the market may choose a new direction, and the specific Trump trade is not one-size-fits-all; it needs to be combined with the specific market and economic environment. This can be referenced in our previous report "The Trump Trade: Analytical Framework Guide": next year's Trump trade will depend not only on the U.S. but also on how strong China's stimulus policies can be

Risk Warning: The progress of the U.S. election exceeds expectations, and geopolitical factors exceed expectations.

Authors of this article: Shao Xiang from Minsheng Securities (SAC Certification No.: S0100524080007), Pei Mingnan (SAC Certification No.: S0100524080002), Source: Chuan Yue Global Macro, Original Title: "After Trump's Victory: The Known and the Unknown (Minsheng Macro Team)"