It feels somehow trivial to mention (let alone analyze) next week’s “other” marquee events and data points considering the enormity of Tuesday’s electoral trial by fire in the US.
It’s just barely an exaggeration to say that America’s system of governance is on the ballot.
Whatever you think of Donald Trump, there is no doubt (none) that he will consolidate power in a second term, where that means immediately replacing key officials (likely starting with the FBI Director and the Secretary of Defense) with loyalists, and pressuring Bill Barr to get more aggressive about prosecuting former officials and public servants under implicit threat of being fired himself.
Here’s the crucial point: Even if that sounds appealing to you based on your personal opinion of Trump and those who are in his figurative crosshairs, as a lifelong student of political history, I can assure you that it is not a road America wants to go down. We will all regret it, from the staunchest Trump supporters to the president’s most ardent critics.
For market participants, the key near-term question is whether the vote is close, and how Trump behaves in a prospective loss. Misinformation and foreign-sponsored propaganda will be rampant, and it’s entirely possible that such efforts will have their desired effect: To sow discord, prompting civil unrest, with a potential read-through for market volatility if everyone isn’t careful. And let’s face, everyone is never careful.
With all of that said, there are a number of other things to watch in the new week, not least of which is the November Fed meeting. Out of respect for the election, it starts a day later than usual.
The FOMC statement and Jerome Powell’s press conference will thus come on Thursday, when the country will either be in flames or not, depending. I jest. I hope.
Both current and former Fed officials have been vocal about the need for more fiscal stimulus. Bill Dudley flat-out said monetary policy is almost “out of firepower” last week, in an Op-Ed.
The clearest path to big fiscal stimulus and, crucially, a sustained fiscal impulse going forward, is a blue sweep that sees Joe Biden take The White House and the Senate flip to Democrats. If you’ve taken anything away from what you’ve read in these pages over the past two months (or so), I hope it’s that if the Senate stays with the GOP, it won’t matter who is president. Not in terms of stimulus, anyway.
Sure, there is likely to be another virus relief bill, but if Republicans hold the Senate, it will be as small as possible (think: between $750 billion and $1.5 trillion) and the chances of ongoing, demand-side stimulus for the hobbled US economy will be materially reduced.
So, depending on the outcome of key Senate races, Powell will likely be asked how the Fed assesses the odds of additional stimulus, and how that might affect monetary policy going forward. He’ll be asked the same question about the presidency, assuming there’s a clear winner by Thursday.
Those questions will be couched in terms that are as neutral as possible, and Powell will surely try to avoid saying anything that tips his political preferences as they relate to the current conjuncture between the virus, the Fed, Congress, and The White House.
Minutes from the September meeting showed Fed officials assumed additional fiscal stimulus by the end of this year. Although Nancy Pelosi has been keen to suggest she’s willing to work with The White House to get that done in the lame duck session regardless of the election outcome, there are obviously more questions than answers.
“The prospects for an accelerated timeline for Fiscal Bailout 2.0 would surely accompany a blue sweep and with it a bias higher for the outright dollar amount – if anything,” BMO’s Ian Lyngen, Ben Jeffery, and Jon Hill wrote Friday. “The question then becomes does this occur before year end or is there an incentive on the part of departing politicians to delay stimulus until the government handover.”
Note that the steepening impulse in the curve stalled as the market began to fade the blue sweep narrative, not so much because anyone doubts it, but rather because it was starting to look uncomfortably consensus, so to speak.
And yet, last week was also notable for the extent to which bonds didn’t manage to cushion the blow from the worst equity selloff since March. Presumably, that was at least partially down to market participants being unwilling to get bullish duration ahead of a possible steepener catalyst courtesy of the same blue sweep the market faded just days earlier. (How fun is that, right?)
The market was palpably disappointed in September that the Fed didn’t tip an imminent increase in monthly asset purchases or a maturity profile extension. Whether or not that gets telegraphed this week will depend at least in part on how the market looks by Thursday. If, heaven forbid, things were to go awry in earnest (where that means there’s widespread social unrest across American cities and/or volatility surges on expectations for some kind of “science fiction” scenario at 1600 Penn.), the Fed would likely need to flood the market with liquidity.
Fingers crossed that doesn’t happen and all we get is some kind of perfunctory nod to the prospect of making current monthly purchases more “stimulative” via WAM extension (for example).
“The operating assumption is that the next move from Powell & Co. will be a WAM extension of the current QE program,” BMO’s Lyngen remarked, in the same Friday note mentioned above. “[There’s] nothing particularly new and/or exciting to be gleaned on this topic in the near term unless the equity market’s weakness extends to levels of triggering tighter financial conditions via a spike in volatility.”
Just a day after the Fed, and three days after the election, the market will be forced to digest October payrolls. Jobless claims remain elevated above the pre-pandemic record set in 1982 and although the labor market continues to heal, the momentum is clearly waning.
It’s obviously impossible to speculate about the impact an above- or below-consensus NFP print could have on markets considering the wildly divergent paths US politics could go down in the days ahead of the release.
If you absolutely insist on saying something about October payrolls before they hit, I suppose it’s worth noting that if the Senate stays with Republicans, the odds of big stimulus will be commensurately reduced, making a disappointing jobs number even more disconcerting. But even there, the situation admits of more than a little ambiguity. For example, if the GOP does hold the Senate, it would presumably mean Democrats would see little utility in waiting to pass a new bill. That is, if there’s no prospect of getting everything they want when the calendar flips, then it should increase the odds of Democrats agreeing to piecemeal legislation in the lame duck session.
In any event, the Fed’s reaction function and the market’s interpretation of the FOMC statement, Powell’s press conference, and October payrolls all hinge to a greater or lesser degree on the election outcome. Or, even more poignantly, a prospective election non-outcome.