Trump drowning under a blue wave could have consequences for Aussie borrowers

The US midterm election may seem a long way from Australia’s property market but in a world where a CEO affair can upend global share markets, the evidence of global connectivity cannot be ignored.

Nvidia is a major engine of US economic growth and has powered the AI boom that has driven much of the stock market’s recent gains. The affair involving a potential Chinese spy by its leader Jensen Huang unsettled Wall Street and sent ripples through markets around the world.

Given that one man’s private life can have that impact, it should come as no surprise that the stunning ‘Blue Wave’ that has weakened a wildly unpredictable US President could have major implications for economies as seemingly removed as Australia’s.

Interest rates are the most obvious economic variable that could turn on the vagaries of Donald Trump’s reaction to voters’ emphatic rejection of his second term in office.

But a raft of other flow-on effects could have a telling effect on Australia’s economy, and by extension, its property markets. Oil and inflation, bond yields, the Australian dollar, trade and economic confidence, could all have implications for housing demand and investment.

Much will get down to the wayward personality of one man. A weakened Trump could become less predictable on the international stage.

Democrats are celebrating a watershed election in which they were handed control of both the House and the Senate. The upshot is that Trump’s last two years in power risk being perceived as a ‘lame duck’ period.

Having lost the power to enact policy on the home front, an embittered president renowned for acting in response to perceived wrongs could be more inclined to use foreign policy to reassert authority. This comes at a time when inflation, energy prices and central-bank decisions remain critical to the Australian housing market.

Before the election results emerged, Trump had already indicated he was weighing up a resumption of the bombardment of Iran, a development that would certainly further constrain oil supply from the Strait of Hormuz.

The Reserve Bank of Australia (RBA) has made it clear that fuel price spikes driving inflation are not to be treated separately to its interest rates decisions.

Australia is both vulnerable to higher energy prices and a beneficiary of them in some respects.

The RBA says Australia is a net energy exporter overall, particularly of LNG and thermal coal, but imports most of its refined petroleum products. It estimates that almost 80 per cent of domestic demand for refined products such as petrol, diesel and jet fuel is met through imports, much of it sourced from Asian countries that rely on Middle Eastern crude.

On the one hand, higher oil prices can increase fuel, transport, freight and construction costs, putting upward pressure on inflation and household expenses. On the flipside, higher LNG and coal prices can lift export earnings, company profits, government revenue and incomes in energy-producing regions.

For property prices, the likely outcomes are not uniform. Resource-rich areas could benefit from stronger export revenues, while households and businesses elsewhere face higher costs.

In a speech by Sarah Hunter – RBA Assistant Governor (Economic), she highlighted how an overseas energy shock could impact Australian households.

“Increases in oil prices are a natural example. These directly increase costs for firms and households in the form of fuel and other refined oil products.”

She pointed out that the risk of those cost increases spreading through the economy.

“When capacity is constrained and inflation is already elevated, firms are more willing to adjust their prices, so the inflationary impulse is passed on more quickly and more fully.

“Some construction firms – who have been relatively highly exposed to transport and oil-derived raw materials cost increases – are reviewing prices for new contracts.”

Ms Hunter also identified the risk of a longer disruption.

“Oil prices could stay elevated for longer than implied by market pricing, and the Iran conflict could lead to broader, more persistent supply disruptions, adding to inflation.”

Higher petrol, diesel, transport and production costs can feed into Australian inflation. If inflation proves persistent, the RBA may need to keep rates higher for longer, or even tighten further, regardless of whether domestic demand is weakening.

The property-market consequences would include higher mortgage rates and serviceability buffers would constrain borrowing capacity, reduce buyer budgets and potentially prolong price weakness. Developers and builders would also face higher construction and transport costs, adding pressure to feasibility and new housing supply.

A president’s inflationary instincts curtailed

The US Federal Reserve, or The Fed, is the independent equivalent of the RBA but has still found itself a constant target of attacks from Trump. Preferring the short-term sugar hit of lower rates to the longer term burden of curbing inflation, he has repeatedly called for lower interest rates at a time when the economy demands the opposite.

This where the mid-term elections could impact Australians.

Australian mortgage rates are influenced by more than the RBA cash rate. A sustained rise in wholesale funding costs could limit how much lenders reduce fixed and variable mortgage rates, even if the RBA starts cutting.

A Democratic-controlled Congress may make it harder for Trump to pursue further tax cuts or spending initiatives, potentially reducing expectations of additional US borrowing.

If investors interpret the result as limiting fiscal expansion, US Treasury yields could ease. That may reduce pressure on global bond markets and, at the margin, Australian wholesale funding costs.

Then there is the Australian dollar. Political instability or a loss of confidence in US policy arising from a lame duck presidency could weaken the US dollar (although a geopolitical crisis can also trigger a flight to the perceived safety of US assets and strengthen it).

But if the US dollar was to be weakened, that could support commodity prices, which may benefit Australia’s export earnings and terms of trade.

Which way Trump falls is yet to be seen. He at first appeared to accept the resounding swing against his party with relative calmness but days later reverted to character by making baseless claims with no credibility about election rigging.

For now, he’s played into the TACO (Trump Always Chickens Out) narrative and pulled back from military threats against Iran.

For now. A standard Trump strategy is to divert negative perceptions with another headline-grabbing act. If that act played out in Iran, it could sway the RBA to whack borrowers yet again.

Christopher Hodge, Natixis’ Chief US Economist, highlighted the risk associated with a Trump with a bruised ego.

“Trump doesn’t like bad news and seeing as how he personally selected many of the struggling candidates, he might be looking to change the narrative sooner rather than later.

“A ‘short and intense’ campaign in Iran has been rumoured ... and that would certainly be a distraction.”

Pride and prices

Shane Oliver, Chief Economist, AMP, also identified the risk closer to home that Trump could pose if he turned his attention back to foreign policy.

“For Australia, a risk is a renewed Trump focus on disruptive foreign policy in the near term, in the form of tariffs and/or war, but this should recede as Trump’s power wanes.”

“Lower oil prices reduce the chance of another rate hike, but our view remains for RBA to be on hold out to late next year.”

If one thing has been made clear in the past week, it’s that the behaviours of one man can have profound international ramifications.

Australian borrowers may soon find themselves at the mercy of the hubris of a foreign president responding to an embarrassing electoral result.