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Talk of Fiscal Spending Keeps Rate Hike Bets Alive

Months of rough and under-the-belt campaigning came to an end last week as the Republican candidate, who was once shied away by his own party members stole the show.

On Wednesday, the world woke up to the news of a Trump victory in the 58th US presidential elections. The world’s largest economy voted for Donald Trump as the 45th President of the United States, an outsider to the political world, and the news spooked the markets.

The reaction was of course justified considering the hard-line stance made by the Republican on aspects of immigration (“I would build a great wall, and nobody builds walls better than me, believe me, and I’ll build them very inexpensively”) to economics (cutting corporate tax rate, simplifying tax brackets, fewer regulations in energy production, repealing Dodd-Frank Act and Obamacare) and monetary policy (“When they raise interest rates, you’re going to see some very bad things happen, because they’re not doing their job”). However, in his victory speech, Trump sounded sober and humbled with his usual “playing to the media” being in check.

As the post-election dust clears, the markets will most likely focus on Trump in the coming month as he is likely to pick a new cabinet of ministers. The initial knee-jerk reaction to the Trump victory saw the equity markets across the globe falling sharply, reminding traders of the volatility witnessed just a few months ago on events that unfolded across the pond, aka Brexit. But soon enough, the markets recovered by the end of the day to close in the positive.

The chart below shows the intraday reaction on the E-mini S&P500 futures.

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E-Mini S&P500 Futures, intraday market reaction on Election Day

The presidential elections not only pushed Trump to the top job in the world, but also gave a clear mandate to the Republicans, with the party in majority in both the senate and the house. This majority is likely to see policy decisions being more efficiently passed but at the same time the GOP is quite likely to put in check if the President elect steps over the line.

As the day unfolded, the victory speech by Trump followed by the concession speech by Clinton gave the markets the much needed reassurance, which led to a risk on mood as the equity markets recovered fully from the intraday slump.

Fed Rate: Prospects are still alive, if the markets give an OK

While earlier in the day, the Fed’s rate hike for December came under the scanner, the markets quickly realized that a Trump victory is unlikely to change the Fed’s mind.

It is not up to Trump on what the Fed will do, but the one factor that will dictate the terms will be the US equity markets. Without the markets being comfortable with a rate hike, it is hard to see the Fed going ahead with the rate hike. It is unlikely to expect the Fed to hold back on a rate hike, purely for political reasons. This would undermine the Fed’s credibility and independence.

This view was clearly outlined by San Francisco Fed president, John Williams who spoke on Wednesday. He stressed on the importance of the Fed’s independence.

“From my perspective that’s the most important thing for the Fed — to continue to have the ability to make the monetary policy decisions that are best for the long run for the U.S,” Williams said.

The CME Futures Fed funds tool assigns a probability of 81% for a rate hike in the December FOMC meeting, as of November 11th 2016 close.

This week, US economic data is on the tap which includes retail sales figures and inflation data for October.

More importantly, the markets will be looking for policy clues from Janet Yellen who is scheduled to speak this week. Some reassurance on the Fed’s independence and rate hike prospects will see the markets likely to prepare for another quarter point hike this December.