Faux Deadlines

The stimulus “deadline” in the US on Tuesday turned out not to be a “deadline,” but it did seemingly succeed in prodding Steve Mnuchin further towards the Democratic position at the margins.

Talks continued on Wednesday and they’ll likely drag on through Thursday too. A deal between The White House and Nancy Pelosi now appears as the most likely outcome, to the extent it makes sense to speak in probabilities anymore. Do the terms “likely” and “unlikely” have any meaning in an upside-down world where grass doesn’t seem to be green on some days?

I don’t have any good answers there, but I do know that most market participants (and certainly the media) now fully understand that without Senate buy-in, all of this wrangling is for naught. 10-year yields in the US are now near their 200-day moving average as incremental progress on a deal at least nods to the notion that one way or another, more spending is coming, whether pre-election, in the lame duck session, or early in 2021.

Never mind how many people will experience food scarcity or go totally bust financially between now and some indeterminate future relief date. “We are now under two weeks to Election Day. At this stage, is there any electoral benefit for either side in passing a stimulus bill that won’t actually stimulate anyone to vote one way or the other, or is there more benefit in the blame game?,” Rabobank’s Michael Every wondered.

Some suggested that perhaps both sides are keen to simply show voters that legislation is being drafted, even if there’s no actual chance of it being passed prior to the election. (Something like: “See? We’re doing our jobs!”)

There were still no concrete indications on Wednesday that the GOP-controlled (for now) Senate is prepared to seriously consider a deal worth nearly $2 trillion. I put emphasis on “seriously” — Mitch McConnell has said his members will take a look, and there were other allusions to that, but it all seems like perfunctory lip service to decorum. The Senate’s attempt to move forward on a $500 billion targeted bill failed, as expected.

Meanwhile, across the pond, those “other” intractable negotiations (Brexit) made some measure of progress, suggesting yet again that brinksmanship was just that: Artificial “deadlines” for the sake of making deadlines. A deal on the latest sticking points (conjured a few months back by Boris Johnson, who inexplicably decided to put a no-deal Brexit back on the table as though the UK’s list of problems wasn’t long enough already) is within reach, EU negotiator Michel Barnier remarked.

The yuan continues to be a compelling story. The currency surged again Wednesday and now sits at the strongest against the dollar since July of 2018, when the trade war heated up in earnest.

The PBoC may not want USDCNH to be a one-way trade (lower), but that’s what it’s turned into. Efforts earlier this month to arrest appreciation by removing reserve requirements on forwards are now a distant memory.

The fix was weaker than expected Wednesday, but it didn’t matter. For six straight days, traders have pushed the currency stronger than the fix. The yuan is seen benefitting both from economic outperformance (as China’s recovery continues) and monetary policy divergence (as the PBoC essentially sticks with a neutral stance versus global peers in full-on easing mode).

Speaking at a forum on Wednesday, PBoC governor Yi Gang said the world’s second largest economy has recovered to “normal” levels. Monetary policy, he said, will be “prudent, flexible, appropriate, and targeted.” (That sounds like something Senate Republicans might say when cynically describing their approach to stimulus for the US economy.)

Of course, the yuan’s strength is aided and abetted by dollar weakness, which in turn is responding to stimulus speculation. The greenback was on track for a fourth day of losses Wednesday.

“Long-end bond yields [are] catching up to the stimulus-led growth narrative, and broad dollar declines show FX markets are following suit,” Bloomberg’s Laura Cooper wrote. “Yet slipping US stock futures and European equities [raise] the question: will rising yields catch up to stocks?”

That’s a question we may need to ask eventually, but likely not right now.