Trump Trade Gains Traction

• USD, Treasury yields, and US equity futures surge as Republicans close in on a trifecta. The Mexican peso is underperforming across the board on expectations of trade friction with the U.S.

• U.S. economy is in a sweet spot which bodes well for USD and Treasury yields.

• There are no policy-relevant economic data releases in the U.S and Europe today. The central banks of Poland and Brazil meet today.

USD, Treasury yields, and US equity futures rise as Donald Trump has the electoral vote edge with 248 vs. 214 for Kamala Harris. It takes 270 electoral votes to win. Trump also won North Carolina and Georgia, two of the seven key battleground states.

Meanwhile, Republicans took control of the Senate. This was expected as Democrats were defending 2/3 of the 34 seats up for 2024. The House race is currently leaning in favor of Republicans with 190 seats vs. 166 for the Democrats. It takes 218 seats to have a majority in the House of Representatives.

It’s not clear when final results will be announced but so far Republicans and Trump clearly have the momentum which is fueling the “Trump trade.” The macro logic behind the “Trump trade” is that fiscal and trade policies under a Trump presidency are inflationary. This can force the Fed to keep the policy rate restrictive for longer. However, Trump’s ambiguous currency policy is a USD headwind.

Historically, the dollar benefitted the most under a Republican president, a Republican Senate, and a Democratic House. The dollar performed poorly when Democrats or Republicans held a trifecta (see table 2 on page 9 here).

Irrespective of the election outcome, the U.S. economy is in a sweet spot which bodes well for USD and Treasury yields. The ISM services index overshot expectations in October surging to a 26-month high at 56.0 (consensus: 53.8) vs. 54.9 in September. The increase was driven by the Employment and Supplier Deliveries indexes.

The Supplier Deliveries Index rose 4.3pts to 56.4 indicative of slower supplier delivery performance. This is typical as the economy improves and customer demand increase. Meanwhile, the Employment Index increased 4.9pts to 53.0 (consensus: 48.0), consistent with an expansion in labor demand. Bottom line: we doubt the Fed will slash the funds rate as much as is currently priced-in (100bps of easing over the next 12 month).

NZD/USD plunged to near a three-month low around 0.5910 on broad USD strength. New Zealand’s Q3 labor market report was weak and leaves plenty of room for the RBNZ to crank-up easing which can further weigh on NZD. Employment fell more than expected by -0.5% q/q (consensus & RBNZ projection: -0.4% q/q) and the previous quarter’s increase was slashed in half to 0.2% q/q. The unemployment rate rose less than expected to 4.8% (consensus: 5.0%) vs. 4.6% in Q2 but that was largely due to a 0.5pts drop in the participation rate to 71.2%, the lowest since Q2 2022. Finally, private sector wage growth was a tick softer than anticipated at 0.6% q/q (consensus & RBNZ projection: 0.7% q/q) vs. 0.9% in Q2.

USD/JPY broke above 154.00 on broad USD strength. There was no new material information in the Bank of Japan’s minutes to the September meeting. Interestingly, members discussed how best to communicate monetary policy after unexpectedly spooking the markets in July with a hawkish hike. Overall, members concluded that “it was necessary for the Bank to carefully disseminate information about underlying inflation, the outlook and risks for economic activity and prices, and the likelihood of realizing the outlook.” Japan’s September cash earning data is up next (11:30pm London). Faster wage growth could raise the likelihood the BOJ resumes normalizing policy at its next meeting December 19. Markets currently imply 36% odds of a 25bps hike for December.

As was widely expected, Bank Negara Malaysia kept rates steady at 3.0%. The central bank reiterated that “at the current OPR level, the monetary policy stance remains supportive of the economy and is consistent with the current assessment of inflation and growth prospects.” Further weakness in MYR will likely prevent the bank from turning dovish anytime soon. The swaps market is pricing virtually steady rates over the next 12 months.

National Bank of Poland meets today and is expected to keep rates steady at 5.75% (between 1:00 and 2:00pm London). At the last meeting October 2, the central bank kept rates steady at 5.75% but Governor Glapinski continued to tilt more dovish and said a cut could come in March, April, or even earlier. He added that under the optimistic scenario, the bank’s March forecasts will show inflation has stabilized and may fall back to the 2.5% target. The updated Inflation Report with new macroeconomic projections will be published. The market is pricing in about 75bps of easing over the twelve months.

Brazil COPOM meets today and is expected to hike rates 50bps to 11.25% (9:30pm London). At the last policy meeting September 18, COPOM started the tightening cycle with a 25bps hike to 10.75% and pointed out that “the risks to its inflation scenarios are tilted to the upside.” Indeed, IPCA inflation has been sticky near the top-end of the 1.5-4.5% target band since July. The swaps market is pricing in 300 bp of total tightening over the next 12 months.