Kid Gloves

In all likelihood, more banks will follow Goldman in cutting their outlook for US growth in 2022 assuming there’s no indication that Joe Manchin is prepared to backtrack on his opposition to Build Back Better.

Democrats were fuming on Monday, and upbeat news from Moderna on the effectiveness of booster shots against Omicron notwithstanding, stocks weren’t amused with the prospect of more fiscal drag tied to the failure of Joe Biden’s social spending package.

Chuck Schumer promised a vote on the legislation “very early in the new year so that every Member of this body has the opportunity to make their position known on the Senate floor.” He also warned Senate GOPers. “[If Republicans] continue to abuse the filibuster and prevent the body from considering this bill, the Senate will then consider changes to any rules which prevent us from debating and reaching final conclusion on important legislation,” he wrote, in a letter.

Appearing on MSNBC, Alexandria Ocasio-Cortez said Democrats “have every right to be furious with Manchin,” but she placed the blame with the Democratic leadership. “It’s really about time we take the kid gloves off,” she remarked.

I’d gently suggest (as I have countless times previous) that if Ocasio-Cortez is serious about seizing her moment, “it’s really about time” she take a page out of Donald Trump’s book and simply declare herself party leader. Readers will scoff. They always do. But Trump commandeered the GOP by sheer force of will, celebrity status, populist appeal and demagoguery. Ocasio-Cortez could avail herself of the exact same toolkit. She’s a celebrity, she’s a populist and although the dictionary defines a demagogue as someone who “makes use of popular prejudices,” that need not mean stoking xenophobia and racism. Instead, it could mean polarizing public opinion against “coal barons” with Maseratis.

Please note: I’m not suggesting that would be a good outcome for America. I’m simply saying what I’ve said before: Revolutions aren’t fought at the Met Gala. Ocasio-Cortez seems unwilling to “go there,” as it were, preferring to snipe at the Democratic leadership from the back bench and troll GOP critics on social media, rather than take it upon herself to bring about the change she claims to be the face of. In short, she’s just not up to it. In that regard, at least, Republicans’ worst fears will likely never be realized.

In any case, analysts will need to factor in expected Omicron-related drag and the absence of additional fiscal initiatives which were baked into forecasts and generally incorporated in base case outlooks for the world’s largest economy. Don’t be terribly surprised if US growth forecasts are trimmed across the board.

“Needless to say, as a meaningful contribution to the market’s assumption of solid real growth in the year ahead, [Manchin’s objection to Build Back Better] represents a setback to be sure,” BMO’s Ian Lyngen and Ben Jeffery wrote Monday. “Let us not forget the building COVID case count and mounting concerns that additional restrictions to combat the Omicron variant will further undermine economic performance in the coming months,” they added, on the way to noting that “while it’s tempting to characterize these concerns as the usual suspects in the current environment, the reality is that the influence of pandemic and stimulus jitters becomes more relevant into year-end as liquidity wanes and conviction is scarce.”

This is set against a backdrop of coordinated monetary tightening across advanced economies. Forgive me (assuming it’s a sin to suggest the PBoC got it right and everyone else wrong), but it appears that developed market central banks waited too long to tighten and are now on the brink of an epic policy error, while China is just starting to ease incrementally in order to mitigate a worsening slowdown.

“The explosive spread of the Omicron variant is raising the risks of more severe restrictions [which] would once again depress economic activity,” SocGen cautioned on Monday. After reiterating that it’ll be “weeks” before the evidence is conclusive on the strain’s severity, the bank said “what is evident is that in the face of rampant inflation… many central banks have finally woken up.” The same note described the burgeoning policy pivot as “the most abrupt policy shift in monetary policy history — from outright easing to outright tightening in a single moment.”

Again, it’s important to consider that in conjunction with the waning fiscal impulse, not just in the US, but elsewhere too. Even if advanced economies continue to conjure new support measures to bolster households, consumers and small businesses amid successive virus waves, the measures will pale in comparison to those deployed in the immediate aftermath of the initial March 2020 lockdowns.

Just as it’s the “flow” effect of QE (i.e., the incremental monthly bid from a price insensitive buyer) that matters for assets more than the “stock” effect (i.e., the sequestration of risk-free assets on central bank balance sheets), so too is it the ongoing fiscal impulse that matters for economies more than the absolute level of legacy deficits and government debt.

Weighing in Monday, Rabobank’s Jane Foley wrote that “the rapid spread of Omicron is… sucking the life out of risk appetite.”

She continued: “The risks to world growth have been [exacerbated] by the body-blow that was dealt to President’s Biden signature fiscal package.”