Donald Trump won the U.S. Presidency last night and there is a 97% chance that Republicans will have control of both chambers of Congress. This is the worst-case scenario for fiscal spending but the reaction from the bond market is telling. The bond market is seeing this as mostly rising inflation expectations, not a problem for U.S. credit (term premium.) In fact, just from the uncertainty of the election being resolved, the U.S. credit default swap for 5 years is lower by more than 10 basis points to 35.5 basis points today (see chart below.) There were never any “Bond Market Vigilantes.” There is more room on the U.S. balance sheet for debt.

In terms of a “Trump trade”, it is certainly active today, with interest rates higher by a lot (2-year +10 bps, 10-year +17 bps), stocks up (S&P +2.0%), and Bitcoin up (+7.6%). But the business cycle is in the exact opposite place as it was when Trump won the first time. When Trump won in November of 2016, the Fed was just beginning to raise rates, and the stock market (S&P 500, no dividends) had risen about 5.7% annualized over the prior two years. Now the Fed is beginning to lower interest rates and the stock market (S&P 500, no dividends) has risen 26% annualized!! over the last two years. I’m not expecting much of a Trump trade now. The business cycle was the true driver of asset prices then and it is the true driver now.

Outside the election, the Fed will decide on interest rates tomorrow. I, and everyone else, expects they will cut 25 basis points. I expect the goal of the press conference and statement to reduce odds of a December cut down from its current 68% because economic data has been so strong. Raphael Bostic, president of the Atlanta Fed, wants a pause in December. It has gotten much easier to agree with him over the last month with stronger inflation, consumer spending, income, and labor markets (excluding the outlier non-farm payrolls print.) There won’t be any reaction from the Fed to Trump’s win, at least yet. Powell will remind at the press conference that the Fed reacts to real policy, not the idea of it.