Georgia Overload

There was no shortage of analysis centered around the Georgia runoffs on Monday and Tuesday.

This is the kind of thing that’s a bit vexing for market participants who, while attempting to drink from the proverbial firehose, invariably think: “Gee, this would have been nice to get last month.”

Of course, some information only became available once early voting got going in earnest, and nobody could have predicted (actually, everyone could have predicted it, but let’s just pretend) that Donald Trump would instruct Georgia officials to retroactively doctor the results of a presidential election on a recorded line. (Feel free to laugh — because while it’s not funny in many respects, it most assuredly is funny when you put it that way.)

Read more: Georgia (Still) On My Mind

Headed into the vote, it was still unclear what effect Trump’s Saturday phone call with Georgia’s secretary of state, Brad Raffensperger, would have on Election Day turnout, but early voting was robust.

“Top early-voting counties include Democratic strongholds like Atlanta-area Fulton and DeKalb counties, but also some Republican-leaning counties, including Greene County, which voted for David Perdue by a margin of 31 percentage points in November,” Bloomberg wrote Tuesday, adding that “Kelly Loeffler and Perdue need to prove they can turn out Republican voters in high numbers without Trump’s name on the ballot, and in spite of unsubstantiated claims by Trump and others of voting improprieties in November.”

For what it’s worth (which isn’t much) PredictIt odds put control of the Senate at a coin flip on the eve of the vote.

“Hilariously, markets are moving on the recent surge in the PredictIt election odds from ‘Dem zero’ to a 50-50 toss-up for both seats,” Rabobank’s Michael Every wrote Tuesday, lampooning “efficient” traders and investors. “Slow hand clap, Mr Market: with Trump allegations of electoral shenanigans in Georgia, how would Democrats not be in a strong position?,” he went on to ask.

For markets, it’s all about the read-through for fiscal policy, although there’s ambiguity there too. As noted on Tuesday morning, a unified Democratic government would  presage more stimulus, but slim majorities would likely serve as a constraint, especially given moderates’ wariness of the derisive “socialism” label.

Every underscored that as well. “The market concern is a ‘blue wave’ means more fiscal spending, and so faster Fed rate hikes or less easing, and a stronger USD,” he went on to write. “Yet with Democrats like Manchin seated, one would again have to be mad to assume a 50-50 Senate would just turn on the taps.”

Of course, if the “taps” aren’t “just turned on” and instead we get rolling gridlock (and remember, gridlock in the post-Trump era is likely to be a particularly pernicious variety of legislative paralysis, as detailed here) you can cancel the pro-cyclical rotation — or at least in any “grand” sense.

“The whole ‘Great Reflation!’ story [would] also [be] shot down after its umpteenth insane iteration,” Every remarked, of a scenario where Democrats’ majority is too slim to matter beyond marginal extra stimulus.

Commenting on all of this in a Monday note was TD’s Chief US Macro Strategist, Jim O’Sullivan.

“While a majority would make things ‘easier’ for President Biden, we caution that it would be difficult for Democrats to advance a highly progressive agenda with a razor-thin 50 seat majority,” he wrote. “Any Democrat sponsored bill will need to win the support of centrists such as Joe Manchin and Arizona’s two senators,” O’Sullivan added, before noting that while a Senate majority “could make it easier for Democrats to confirm more progressive candidates to cabinet posts, given the broad range of agreement required, we believe that nominees would not shift too far left.”

One thing that nobody seemed to be able to agree on, is the read-through for the dollar. Would a Democratic majority and the prospect of more stimulus mean higher yields as inflation expectations increase, leading markets to expect better growth outcomes in the US and faster Fed normalization? If so, that’s ostensibly positive for the greenback.

Or, alternatively, would bigger stimulus just mean markets become more dollar-bearish than they already are as additional borrowing, “worse” deficit outcomes, and more Fed asset purchases to accommodate increased Treasury issuance, all work to underscore the structural dollar bear case? Throw in the notion that higher taxes might make US assets less attractive, and you’ve got an extra bearish kicker.

The truth is, nobody knows. All of this is impossible to game out ahead of time. For example, there are so many variations and iterations on those two alternative paths for the dollar that any decision tree would have dozens of branches.

BMO’s Ian Lyngen summed it up well on Tuesday morning. “The two races are close and therefore the market is left to simply trade the results rather than price to any consensus outcome ahead of the event,” he said.