Several surprises came from Donald Trump’s US election win. The first was that he won given the vitriolic way that he conducted his election campaign and pre-election opinion polls pointing to a comfortable win for Hillary Clinton. Another set of surprises came almost immediately after it was clear that he had won. The reactions in financial markets were the opposite of what was widely expected. Ahead of the election, a Trump presidency was widely viewed as being bad for US economic growth prospects on the basis that promised moves to increase trade barriers and reduce immigration would more than offset potential benefits from proposed lower taxes, reduced business regulation and greater government spending.

The financial market reaction to the Trump win was to focus more on the growth positive parts of Trump’s election proposals. As a consequence, the US dollar rose rather than fell. The US share market rose rather than fell too and US bond yields also rose rather than falling as expected. It could be just a case that the sell a Trump victory pre-election was a very crowded trade and open to substantial short covering after the event. If this is the case, markets will settle back over time to view Trump as negative for growth, risk assets and the US dollar, but consistent with rallying bond markets and lower interest rates.

We lean towards the view that financial markets will eventually settle back to their pre-election view of Trump, but the moves by markets have shaken our confidence in this view. There is a possibility that once Trump is President in late January that he does try to focus on the more on the growth positive parts of his plan. If President Trump is able to initiate a substantial infrastructure building program, start cutting top rate personal tax and US company tax and reduce business regulation US economic growth prospects for late 2017 and beyond would look considerably stronger and probably with a burst of inflationary pressure too.

The key elements of this faster growth US economy with higher inflation too over time are much higher government spending, lower taxes and reduced business regulations, including on US banks. One important point is that President Trump can only initiate these policies. Congress and the Senate hold the budget purse strings and they ultimately will determine whether Trump’s policies are legislated. The Republicans have majorities in the House and the Senate, but a large number of Republicans are unwilling Trump supporters and likely to be even more unwilling when faced with tax and spending proposals likely to push the US budget deficit sharply higher for a number of years.

Extended budget wrangling between President Trump and Congress could stymie Trump’s higher spending /lower taxation plans and almost certainly would if this were occurring in the first half of this decade rather than the second half. Through the first half of this decade the long and dark shadow from the global financial crisis and the following great recession for many including the United States forced a rethink on what policy levers could be used to try a promote economic recovery. Government budget deficits were in many cases too high to allow resort to conventional fiscal stimulus. Indeed for many budget deficits were so high that deficit containment seemed mandatory. The burden of trying to promote better growth fell increasingly upon central banks pushing down official interest rates, below zero in some cases, and resorting to unconventional methods to prime commercial banks’ liquidity in the forlorn hope that they might lend more aggressively.

Over the past year or so serious questions have been raised about the efficacy of monetary policy, particularly very low or negative interest rates. The macro-economic policy orthodoxy of easy monetary policy combined with restrained budgetary policy pursued almost everywhere through the first half of this decade is under challenge and mostly from a growing view among economists that greater government spending has more of a role to play in promoting growth. It is possible that President Trump could ride this wave of changing views about macro-economic policy perhaps deflecting Congressional opposition more easily than might have been the case a year or two ago.

Even if President Trump becomes a champion of growth-positive policies the beneficial effect can still be largely negated if he holds on to populist, but growth- negative policies relating to trade protectionism and reduced immigration. This is where it is very hard to assess what may happen to the US economy under President Trump. What is he most committed to – greater government spending, lower taxes, less regulation or putting up trade barriers and reducing immigration? Is it even a case of either the pro-growth set of policies or the low-growth set? Maybe it is a mix of both and whatever plays best to those who have elected him and what he can negotiate through Congress.

The uncertainty about the outlook seems to present a strong case for an extended phase of volatility in financial market sentiment while President Trump’s actual policy program rolls out. In the very near-term markets are hoping that the pro-growth elements in President-Elect Trump’s promises win out. If they continue to do so we will need to revisit our interest rate outlook as interest rates will be much higher than we are currently forecasting for 2017. The problem is that we cannot tell at this stage whether such an adjustment is necessary – we simply need more information about what President-Elect is likely and able to do. Big protest votes against the prevailing system are not just challenging for opinion pollsters, but for economic forecasters too.