Reduced chances of US fiscal stimulus after elections, Morgan Stanley says
Chances are US economic policies will change little, or only gradually so, after the US elections in November, Morgan Stanley said.
Certainly, recent activity in US financial markets appeared to show that was what markets were pricing-in (with the US dollar/Mexican peso exchange rate an exception), as Hillary Clinton had obtained a wide lead in the polls over her Republican rival, Donald Trump.
A case in point were the behavior of so-called 'implied volatilities' for US healthcare and financial stocks around the date of the election, which were not overly steep, the broker wrote in a research report sent to clients.
Nonetheless, even if Clinton did come out on top the Republicans were very well-represented in both chambers of Congress, the US House of Representatives and the Senate, which was a recipe for policy 'gradualism' and not 'radicalism', the broker said.
Among other things, that meant the odds were against near-term fiscal stimulus Stateside, given that policy-making was hard to do in divided governments.
Furthermore, since Franklin Delanor Roosevelt's time fiscal stimulus had only been applied once in the US outside of a recssion, in June 1977, during the Carter Administration.
At the time of writing, Morgan Stanley saw a 40% chance that the US would fall into a recession.
Polls were also pointing to Republicans - who would likely stand on their fiscal-hawk principles - holding on to their majority in the House, Morgan Stanley said.
"Yet, that doesn't make it impossible, far from it. We think the best chance exists in our 'Trump Turns Up the Base' scenario, where'dynamic scoring' could engineer a tax-cut that is politically palatable to conservative budget hawks," they added.
Dynamic scoring is how the Tax Policy Center evaluates the impact on the budget from changes in macroeconomic policy, by also taking into account the resultant effects on economic growth.
Stimulus was possible under a Clinton presidency too, the analysts said, "but less likely in our view."
"We think she would need to open a more substantial lead in the popular vote (high single digits, north of 50% support) in order to just introduce the possibility of flipping House control to the Democrats, clearing the path for transformative policy-making."