The week ahead’s certain to be
Remarkable, as we shall see
More Fedspeak, of sorts
And data on jobs finally
There should be no lack of excitement this week as (hopefully) the election season finally winds down and we can all try to begin planning for the next four years of policy. At this point, most of the polls continue to show there will be a change in the White House, with a fair number of polls predicting a blue wave, where the Democrats retake the Senate, as well as the Presidency. The thing about pollsters is they are very much like economists; they take the data they want and extrapolate the information in a linear fashion going forward. The problem with this approach, both for economists and psephologists, is that very little about life or the human condition is linear. If anything, my observation is that life is quite cyclical, with the key being to determine when the cycle is changing. As Yogi Berra is reputed to have said, “it’s tough to make predictions, especially about the future.” But predictions galore are certainly being made these days.
For our purposes, however, it is important to continue to game out the potential outcomes, and for hedgers, ensure that proper hedge protection is in place. Regarding fiscal policy, it seems quite clear that a blue wave will usher in unprecedented levels of additional fiscal stimulus, with numbers of $3 trillion – $5 trillion being bandied about. If the status quo remains, with President Trump being reelected and the Senate remaining in Republican control, I expect a much smaller stimulus bill, something on the order of the $1.8 trillion that had been discussed up until last week. Finally, in the event the Republicans hold the Senate, but Mr Biden wins, we are likely to see the reemergence of fiscal conservatism, at least in a sense, and potentially any bill will be smaller.
With that as our backdrop, the consensus view remains that a Biden victory will see a weakening of the dollar, a steepening of the yield curve and an equity market rally. Meanwhile a Trump victory will see a strengthening of the dollar, a more modest steepening of the yield curve and an equity market rally. It is quite interesting to me that the consensus is for stocks to continue to rise regardless of the outcome, and for the long end of the bond market to sell off, with only the degree of movement in question. I have to ask, why is the dollar story different? The one conundrum here is the expectation of a weaker dollar and a steeper yield curve. Historically, steep yield curves, implying strong future growth, lead to a stronger dollar. And after all, it is not as though, the dollar is at excessively strong levels that could lead one to believe it is overbought. Regardless, this seems to be what is built in at this stage.
Moving on to the FOMC, Thursday’s meeting, two days after the election, is likely to be the least interesting meeting of the year. It strains credulity that the Fed will act given what could well be a lack of clarity as to the winner of the election. And even if it is clear, they really have nothing to do at this time. They are simply going to reiterate the current stance; rates will not rise before 2023, they will continue to purchase bonds ad infinitum, and please, Congress, enact some more fiscal stimulus!
As to Friday’s employment report, it will depend on whether or not the election is settled as to whether the market views the numbers as important. If the results are known and it is the status quo, then investors will pay attention to the data. However, if either there is no clear result, or there is a change at the top, this will all be ancient history as the market will be preparing for the new Administration’s policies, so what happened before will lose its significance. This is especially so given the expectations for a significantly larger fiscal stimulus outcome, and therefore a significant change in economic expectations.
So, that is how we start things off. Equity markets have shaken off last week’s poor performance and are rebounding nicely. Asia started things on the right foot (Nikkei +1.4%, Hang Seng +1.5%) although Shanghai was flat on the day despite a better than expected Manufacturing PMI print (53.6). Europe, meanwhile, is rocking as well, with the DAX (+1.85%) and CAC (+1.8%) both ripping higher while the FTSE 100 (+1.2%) is also having a solid day. US futures are all pointing sharply higher as well, around 1.5% as I type.
Bond markets are actually mixed this morning, with Treasuries rallying slightly, and yields lower by 1.5 basis points. However, in Europe, we are seeing bonds sell off (risk is on, after all) although the movement has been quite modest. After all, with the ECB promising they will be adding new programs come December, why would anyone want to sell bonds the ECB is going to buy? Of more interest is the fact that Treasury prices are rallying slightly, but this is likely to do with the fact that the market is heavily short Treasury bond futures, and some lightening of positions ahead of the election could well be in order.
On the commodity front, oil prices are falling further, as the renewed wave of lockdowns in Europe has depressed demand, while Libya simultaneously announced they have increased production to 1 million bbl/day, the last thing the oil market needs. Gold, meanwhile, is moving higher, which strongly suggests it is behaving as a risk mitigant, given the fact neither rates are falling nor is the dollar.
As to the dollar, arguably, the best description today is mixed. With so much new information yet to come this week, investors and traders seem to be biding their time. In the G10, it is an even split, with three currencies modestly firmer, (CAD, NZD and AUD all +0.2%) and three currencies modestly weaker (NOK and GBP -0.2%, CHF -0.1%) with the rest essentially unchanged. The one that makes the most sense is NOK, with oil continuing its slide. Surprisingly, the pound is weaker given the story circulating that the EU and UK have essentially reached a compromise on the fisheries issue, one of the key sticking points in Brexit negotiations.
Emerging market currencies have a stronger bias toward weakness with RUB (-1.25%) and TRY (-1.0%) leading the way lower. Clearly, the former is oil related while the lira has been getting pummeled for weeks as investors continue to vote on their views of Turkish monetary policy and the economic potential given new sanctions from the West. But after those two, most APAC currencies were under pressure, somewhat surprisingly given the Chinese data, however, INR and TWD (-0.45% each) also underperformed last night. On the plus side, CZK (+0.35%) is the leader, benefitting from a better than expected PMI print.
Speaking of data, Manufacturing PMI’s from Europe were all revised slightly higher, but had little overall impact on the FX markets. This week, of course brings a great deal of info:
|ISM Prices Paid||60.5|
|Unit Labor Costs||-10.1%|
|FOMC Rate Decision||0.00% – 0.25%|
|Average Hourly Earnings||0.2% (4.6% Y/Y)|
|Average Weekly Hours||34.7|
Adding to the mix is the BOE meeting on Thursday as well, while the RBA meets tonight. To me, this is just trying to level set as we await this week’s extraordinary possibilities. Nothing has changed my view that the dollar is likely to strengthen as the situation elsewhere in the world, especially in Europe, is pointing to a terrible Q4 outcome economically (and, I fear in the health category) which will continue to weigh on the euro, as well as most emerging markets. But one thing is clear, is there is a huge amount of uncertainty for the rest of this week.
Good luck and stay safe