Tim Graf (TG): This is Street Signals, a weekly conversation about markets and macro brought to you by State Street Global Markets, the Markets and Financing Division of State Street. I'm your host, Tim Graf, European Head of Macro Strategy.

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And with that, here's what's on our minds this week.

Hi everyone.

It's 1.30 on Wednesday afternoon in London, 8.30 in the morning, Boston time. We're recording this episode a little later than we normally would, and publishing it a little bit ahead of our normal schedule on Wednesday. The reason, of course, is that this is the day after the US election, and the results are basically in.

Donald Trump has been confirmed as the 47th president of the United States, no doubt bringing forth all sorts of comparatives to Grover Cleveland that I'm very much looking forward to reading. The Senate has flipped back to the Republicans as well, to no one's surprise. And we're still waiting to get the full makeup of the House of Representatives. Prediction markets are overwhelmingly priced for the Republicans to retain control of the House, and to solidify the red wave and Republican control of all branches of government. But there are still plenty of uncalled seats in the House, and it will likely take a few days before we can confirm where that stands.

So that's the state of play.

Now, to get reaction and to think about what all of this means for markets, this week I have Noel Dixon on the podcast. If you receive our research, you will likely know that Noel is our in-house commentator on all things US politics. So he is the ideal voice to have on in reaction to yesterday's election and the results we're seeing today.

Hey Noel, how's it going?

Noel Dixon (ND): Oh man, I haven't slept, literally.

TG: That was my first question.

ND: I did not go to sleep. I tried, but I couldn't. I was like, did he win or not? And sure enough.

TG: It's really difficult, like even here where you know, you're not going to really know anything until probably three, four, five in the morning. I woke up at one and really struggled. I did get back to sleep, but I really struggled to get back to sleep and then maybe got another hour or so.

ND: But here we are.

TG: Here we are.

ND: The sun still came up, at least here.

TG: Yeah. The sun still came up. The country is still there. It still will be there in four years, I suspect.

I know you've got stuff coming up, and I just wanted this to be a quick chat. It's great to get your time on this. So let's just start with your initial impressions here.

I mean, this wasn't necessarily a surprise in that prediction markets had this as the outcome, the more likely outcome, I should say, for a pretty long time, the last month or so at least, even if polls were quite close.

So I just wanted to start with what really did surprise you the most from all of these results, whether it was the presidency or the congressional elections, what stood out as the biggest surprise to you?

ND: The biggest surprise was just how bad of a margin that Harris lost by. I think every indication was that Trump may have been favored, but it would be relatively close. Even with Georgia, when that first released and you got the independent voters, Biden won it by nine points and it moved 11 points, and Trump's favor, which was an early warning sign, those things were very surprising.

TG: What were the issues that you really think drove this? This was, it's hard to say it was an issues-based campaign. It became very much about personalities, I think, at the end of the day.

But what in terms of exit polling or just things you’ve read in terms of previous surveys of voters, what issues really drove this?

ND: I would say one word, inflation.

TG: Right.

ND: That came across. I think that Trump was leading on the economy and all the exit polls, all the pundits that interviewed constituents, that it was a pretty consistent theme, which was prices are too high, it's been rough to make ends meet, and that I think carried over into all the key swing states.

TG: I mean, it's certainly something that has cost incumbents in really every country of significance. We've seen a lot of elections this year. This was the year of the election. And I don't even think it was a left or right thing at all. You can look at the opposite movement happening here in the UK with Labor winning, a very, very large majority, and inflation was coming down here just as it was in the US, but wage growth wasn't keeping pace with it, and incumbents were penalized for that.

In terms of the demographic shifts, you talked about looking at this as results were starting to come out late last night. That was really interesting to me, and I'm wondering if you can highlight some of the big shifts in Trump's favor that really moved the dial for him.

ND: The first obvious one was male voters, I think disproportionately went into his favor. I think what was interesting was that younger male voters really gravitated towards Trump, young African-American males. You know, she still did pretty well. She got on average, I think, like 80 percent, but that still was shy of Biden's 89 percent that he got in 2020. So that really stood out.

Overall, with women voters, she did pretty well, but still slightly underperformed broadly relative to Biden, which was interesting. And then finally, I think what's looking interesting, we'll have to wait to tally everything up. But it seems that Trump won the popular vote, whereas on track to win the popular vote, that's also striking.

TG: One more demographic factor I wanted to ask about was education. I mean, historically, it's been the case that Trump has appealed to non-college educated voters and Democrats generally have appealed more towards college educated.

Did we see any shifts in trend on that front this time around?

ND: I think that was pretty consistent in terms of the directionality. But I think Trump won even more. He actually improved his numbers, and Harris underperformed relative, again, relative to Biden in 2020. So that's the difference. I mean, as far as the margins, it's still consistent, but Trump just, you know, he just overperformed just a little bit more, and Harris underperformed.

TG: Yeah, as you say, it's looking very, very likely that Trump is going to win the popular vote. The first time that has happened for a Republican since George W. Bush in 2004, which really underscores all of these things you've been saying about how disastrous this seems to have been for the Democrats.

I’m wondering, though, if you can point to any positives, and here I’m talking from state level races on upwards, or anything to do with turnout, or any demographic factors that at least should give them something maybe to build upon for the next cycle.

ND: Yeah, I think there was some splitting of tickets in certain places, like in North Carolina, the Democratic governor won there, although Trump carried the state. I think independent or moderate Republicans, I think that was a good gain for Democrats that they can build off of, sort of Mitt Romney's and Cheney's of the world. The Democrats made some ground with that constituency, so I think that's an area they could build upon. Outside of that, I think unfortunately, I think they trailed in a lot of places that I think they're going to have to do some soul searching, especially with Latino voters. I think they really struggled across the board with Latino voters, and that's something they're going to have to address.

But I think, you know, as far as down ballot, I think, you know, the governor ships worked out. We'll see what happens with the House. It looks like they're doing decently in some of the key New York districts. I think one California district, they looks like it's going their way. So the down ballot split vote was OK. And moderate Republicans, I think, is also a good gain for them.

TG: Well, that's probably a good way to segue in now to the market impacts we have here. Because of course, the composition of the House is everything when it comes to Trump getting his agenda across. And I suspect the size of any majority also might matter to some degree as well. And we don't know. And it's probably going to be days before we do know. So it's all a little bit speculative.

But I'm wondering if we can talk about markets here. And we've published a reaction piece. Actually, you and the Boston team did a great job getting that out very, very quickly, not long after polls closed on the West Coast. And we started to get a real sense of what the outcome was going to be. But let's just start with some of the aspects of that.

In terms of the very broad decision between equities versus bonds, how does this result line up with maybe some of the metrics we have that show where investors are positioned in that equation?

ND: As far as equities are concerned, I think investors, they weren't completely overweight. I think they were relative to previous cycles, maybe the most overweight since 2004. So there's definitely, I think, room to add some positions. I think as it released to tech, I think some investors squared up before the election. So now I think they have permission to buy. So I think there's room to run in the tech area.

When we think about FX, I think the dollar certainly has some room to run. Investors were pretty neutral. Everything related to, I think, Trump's perspective is, I think, it's going to be a dollar positive, I think, moving forward. So I think those are the two key areas that I think really stand out.

TG: And what about in rates? I mean, that has been part of the whole Trump trade narrative, whether it's crypto, FX, equities. You have a rate component to this as well with back end rates especially coming under pressure and the yields rising quite dramatically and the curve bearishly steepening today.

What do we have as far as positioning within rate markets that speak to whether or not this can continue? Is this a move that you want to start fading because it's crowded or is it one you want to, like some of the others, you want to kind of go with for a little bit?

ND: You want to probably still go with this. And I think we're seeing that in some of the behavior overnight. I think you definitely get the steepening now. And to be fair, I think, like we were just discussing, I think the jury is still out on the house. So I think that could be the fuel to get us closer to that 5 percent mark on the 10 year, is if we actually get confirmation that they get a red sweep.

But for now, I think we're on a gradual pace to 5 percent on the tenure, not just because the fiscal policy, of course, but I think the economic data, the economic surprises in the US have been positive. So I think you augment the fiscal situation with just positive fundamental economics. And I think you have that pick up in term premia, you have a pickup in real rates, frankly, probably a pickup in inflation expectations, and that could get you to 5 percent.

So we think you definitely continue with basically selling duration.

TG: Well, that brings to mind a very interesting question then, because we're going to publish this on Wednesday. And actually, for once, we're going to get ahead of a Fed meeting. We're going to have a podcast out before the Fed meets, as opposed to after it. And the Fed, of course, meets tomorrow.

And 25 basis point cut is heavily discounted. It is in the price fully. But the path for the Fed becomes, of course, a lot more interesting now. A lot of easing has been taking out with a lot of the moves in rates that we've seen over the last month, with Trump's probabilities rising, that the US data you talked about looking better and better and surprising strongly. We've taken a lot of easing out.

How much further do you think markets can price for a less dovish Fed or even maybe a hawkish Fed?

ND: What's been taken out so far, I think, is justified. I think we're in the right place. I mean, they're still going to go tomorrow. I don't think they can make a judgment. I think they'll keep it open-ended, reiterate their data dependent, because they don't know exactly what the policy is going to be at this point.

Trump's said a lot of things. It's a lot to digest. Again, we have to see what happens with the House. From their perspective, they're still relatively restrictive. So I think the next two cuts are probably the easy ones to make. And then I think as we get into next year, it will be more of a question in terms of what the impact of fiscal policy will be, what the neutral rate is. So I think rate markets have it right about here.

TG: Fantastic. Well, Noel, I really appreciate your time. I know it's been quick, but I also know you've got other calls you have to make today. You probably have stuff to write. You've got a lot to think about, as you said, there's a lot to digest. And I know for a fact, actually, you have other calls that you need to be on pretty shortly.

So, I'm going to let you go. I'm going to say thank you. And thank you very much for making your debut appearance on the podcast, at least the public version of the podcast, on what is likely to be one of your busiest days of the year. I really appreciate it.

ND: Yeah. Well, I appreciate you having me. Please welcome me back.

TG: Absolutely. Anytime. Talk soon. Thanks, Noel.

ND: Cheers. Bye.

TG: Thanks for listening to this week's edition of Street Signals from the research team at State Street Global Markets. This podcast and all of our research can be found at our web portal Insights. There, you'll be able to find all of our latest thinking on macroeconomics and markets, where we leverage our deep experience in research on investor behavior, inflation, risk, and media sentiment, all of which goes into building an award-winning strategy product.

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We'll see you next time.