Secondary Concerns

It still feels a bit strange to speak about what could move markets in the week ahead considering the circumstances.

In the simplest possible terms: As long as Donald Trump is still fighting COVID-19, everything else is of secondary importance.

The president spent the weekend at Walter Reed, where he was either treated as a high-risk COVID-19 patient (due to his age and weight) or simply “monitored out of an abundance of caution” after testing positive, depending on which spin you prefer.

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Oxygen & Obfuscation

As ever, the truth appeared to be somewhere in between.

Trump did experience some problems breathing on Friday and was administered supplementary oxygen at The White House. That’s according to his physician, Sean Conley, who on Sunday effectively admitted to having obfuscated during Saturday’s update, when he refused to answer direct questions about whether Trump received any oxygen. The president was put on dexamethasone, he said.

And yet, Trump’s team on Sunday announced the president could be discharged as soon as Monday, which would be a bold claim to make if he were seriously ill. While there was plenty of speculation around Trump’s actual condition over the weekend, the videos the president posted to Twitter Saturday and Sunday did not show a dying man. Trump is nobody’s idea of a Men’s Health cover anyway, so one could easily argue he looked no “worse” over the weekend than he does on any other day.

Whatever the case, until there’s clarity on that, everything else is a sideshow. But, the (side)show must go on, as they say, and this week it will feature the September FOMC minutes.

Market participants will be keen to parse the account of the meeting given the dissents and Robert Kaplan’s public remarks around the desirability of preserving optionality by eschewing outcome-based forward guidance.

Remember, the September FOMC ushered in a “new” regime, wherein officials committed to hold rates at the lower-bound until the dual mandate is achieved. That, as opposed to the previous guidance which would keep rates near zero until the economy is deemed to be “on track” to meeting the Fed’s goals.

This is a somewhat silly distinction. The Fed always maintains its optionality. If the Nasdaq took off to 50,000 or some other egregious distortion were to emerge, it’s not as if the guidance from the September statement is binding or etched in stone. That said, the Fed is notoriously inept when it comes to preemptively popping bubbles (and will tell you they aren’t easy to spot ahead of time), so one can understand Kaplan’s ostensible concern. Jerome Powell, for example, can no longer find the duration bubble he spotted eight years ago.

But Kaplan’s dissent appeared (to me anyway) designed merely to give the impression that the Fed is cognizant of the extent to which committing explicitly to keeping rates at zero until certain thresholds are hit, could inflate bubbles in financial assets. His dissent was also likely aimed at offsetting Neel Kashkari’s dissent in the other direction. In other words, it’s not clear that this is a meaningful discussion, and the market will look to the September meeting minutes for clues on that.

I’d reiterate that if PCE moves back up to target anytime soon, it will raise questions about average inflation targeting just months after Jerome Powell’s unveil.

Obviously, the Fed would welcome such an outcome (that’s the whole point), but considering the commitment to keeping rates at the ZLB for three years, a quick move up to target would likely prompt concern that the acceleration is perhaps indicative of an overshoot coming faster than officials expected. If it coincides with a larger fiscal impulse (e.g., after a Democratic sweep), the topic could become more urgent.

Across the pond, we’ll get minutes from the ECB’s September meeting and they too will be parsed for nuance on inflation in the wake of the pandemic.

Persistent euro strength over the summer undermined the central bank’s efforts to offset the disinflationary impact from COVID. The flash read on September CPI missed on Friday, printing -0.3%. Core hit a record low 0.2%, underscoring similarly disconcerting country-level data out earlier in the week.

After electing not to push back verbally against currency strength at her post-meeting press conference last month, Christine Lagarde subsequently expressed concern about the FX pass-through effect on prices and there’s now speculation the ECB could follow the Fed into average inflation targeting.

“If credible, such a strategy can strengthen the capacity of monetary policy to stabilize the economy when faced with the lower bound”, Lagarde said late last month, during a conference in Frankfurt. “This is because the promise of inflation overshooting raises inflation expectations and therefore lowers real interest rates”.

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The market is also expecting an expansion of the ECB’s emergency pandemic purchase program by the end of the year. Suffice to say recent inflation data have bolstered the notion that additional stimulus is in the cards.

Meanwhile, monthly GDP figures are due from the UK, where concerns around the expiration of a key furlough program have conspired with virus worries and another Brexit boondoggle to undermine sentiment.

The BOE is widely expected to increase its own QE program later this year, and there is an active discussion about negative rates. The UK fared the worst among developed economies during the pandemic plunge.

Again, all of this is secondary to US political concerns. Over the weekend, Trump, tweeting from the hospital, implored lawmakers to deliver more fiscal stimulus. Markets would like to see Steve Mnuchin and Nancy Pelosi keep talking, especially given airline layoffs and Friday’s somewhat disappointing jobs report, which came with a bevy of uncomfortable statistics suggesting structural damage to the US labor market is piling up.

Even if there’s clarity on Trump’s health, the US election will dominate the discussion for one simple reason: The result has massive implications not just for America’s democracy and for the world’s largest economy, but for the future of the post-War international order — or whatever’s left of it, anyway.

The vice presidential debate is still scheduled for Wednesday.