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

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.