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US Presidential Election on Tuesday 8th, which is worryingly too close to call

Stephen Roberts

Altair Asset Management

Approaching big events

The Q3 CPI will be released later this morning and if it comes in close to market expectations of 0.5% q-o-q, 1.1% y-o-y and with the two main underlying inflation measures coming in around 0.4% q-o-q, it is unlikely that the RBA will change its 1.50% cash rate at its policy meeting next Tuesday. The CPI release could become a more important event if it comes in markedly lower than expected bringing a possible cash rate cut in to play. As we wrote last week, if the RBA does not cut cash rate next week, as seems most likely, the drift upwards in Australian bond yields will probably be underpinned and in time higher funding costs for banks could promote a lift in their lending interest rates. Where the CPI comes in, therefore, is quite a big event having an influence on the interest rate outlook as well as the outlook for the Australian dollar exchange rate.

Beyond our local CPI and RBA meeting, markets are watching the US election

Beyond the CPI later this morning and the RBA policy meeting next Tuesday another big event is now looming, the US Presidential Election on Tuesday 8th November US time. The result that seems least likely to upset financial markets or change unduly the US economic outlook extending to the global economic outlook is Hilary Clinton winning the race for the White House, but with the Republicans holding both the House and Senate, as they do currently, or perhaps the Democrats winning the Senate requiring only a small swing their way in the election, but with the Republicans holding the House. A clean sweep for the Democrats holding the presidential race but taking both the Senate and House from the Republicans would imply that President Clinton could pursue and legislate much of her policy agenda including higher taxes and higher social spending an unwelcome development for some US businesses.

The result most likely to upset financial markets and reduce US economic growth prospects is if Donald Trump wins the presidential race. Given that recent opinion polls place Trump more than 10 percentage points behind Clinton, this seems an unlikely outcome. If the opinion polls turn out to be inaccurate, however, a Trump win would almost certainly come hand-in-hand with the Republicans holding the House and Senate too. President Trump would be relatively free to pursue his trade protectionist; anti-immigration; budget deficit blowing (more spending with reduced taxes) agenda. Financial markets would have good cause to be alarmed by such an outcome implying an even lower-growth US economy with rising interest rates.

The US Presidential voting system explained

The issue is whether the current US opinion polls are an accurate indication of what might happen on November 8th? It is a difficult question to answer partly because of the unique and quirky way that the President is elected in the US. It is worth taking a look at the presidential election process, which even many voters in the US are hard pressed to explain.

The first point is that Americans do not cast direct votes for who they want to be President. They vote for 435 members of the House of Congress and 100 Senators (every US state is entitled to two senators regardless of its population).

From this group of 435 House representatives plus 100 senators, plus an additional 3 for the District of Columbia comes basis for calculating the Electoral College of 538 voters who actually cast votes for the President. The actual Electoral College voters are party officials selected by their political parties in each state. The number of Electoral College voters in each US state is determined by its number of members in Congress plus two senators. The smallest number of Electoral College voters in any state is three in Alaska; Delaware; Montana; North Dakota; South Dakota; and Wyoming. The District of Columbia also has three Electoral College votes. At the other extreme, California has 55 Electoral College votes; Texas 38; and Florida and New York 29 each.

The U.S Electoral College – what matters…

The 538 Electoral College voters go to their state capital to cast their votes on the second Wednesday after the presidential election. By convention almost all vote the way dictated by the vote in their states i.e. if the majority of the popular vote in California is Democrat all 55 Electoral College voters vote Democrat. There is a minor exception in the case of Maine and Nebraska where electors can place their votes on a 2-1 basis.

In practice, the Electoral College vote is a formality dictated by the popular vote in the presidential election eight days before.

A total of 270 Electoral College votes are needed to win the presidency. In the 2012 election Barak Obama won 332 Electoral College votes (26 states plus District of Columbia) against Republican candidate Mitt Romney’s 206 (24 states). In the approaching election some Electoral College votes are already taken as decided (the equivalent of blue ribbon seats in an Australian election). Even before the election Hillary Clinton is starting effectively with 222 Electoral College votes against Donald Trump’s 163.

…is what happens in 12 US states

Only twelve states are really in contention, referred to as the battleground states. These twelve states will cast 165 decisive Electoral College votes.

Several of these twelve states have large manufacturing sectors challenged by foreign competition, such as Michigan (16 Electoral College votes); Pennsylvania (20); Iowa (6); and Ohio (18). Two are at the heart of the immigration debate, Florida (29) and Arizona (11). The opinion polling in these states is much closer.

Hillary Clinton appears to have a comfortable lead in the presidential election race based on national opinion polling, but really it’s how and how many people choose to vote in just twelve US states that will determine the outcome of the US presidential election, and that is still worryingly too close to call.

[Altair Economic Insights 26 October 2016_weekly.pdf]


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Stephen Roberts
Stephen Roberts
Chief Economist
Altair Asset Management

Stephen is the Chief Economist and a member of Altair’s Investment Committee. He provides a comprehensive review and outlook of macro-economic factors likely to influence financial markets. Stephen is an economist/strategist who has worked for...


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