Summary and Price Action Rundown
Global risk assets are mixed this morning after yesterday’s rally as investors struggle to gain greater clarity on the US political and policy outlook. S&P 500 futures indicate a 0.2% lower open after the index soared 1.8% yesterday, lifting its year-to-date gain to 5.5%, which is less than 5% below early September’s record high. Equities in the EU and Asia were gently mixed overnight. After yesterday’s burst of optimism on the fiscal stimulus front sharply weakened the dollar and hoisted longer-dated Treasury yields, both are settling down this morning, with the 10-year yield at 0.77%. Brent crude prices are continuing to recover a portion of last week’s steep downtrend, bouncing back toward $42 per barrel.
Tentative Easing of US Political Uncertainty
President Trump’s return to the White House from Walter Reed hospital last night has somewhat moderated US political uncertainty, as an increasing number of analysts suggest that recent development may be adding a degree of clarity to the political and policy outlook. As concerns over a worst-case health outcome for the president have eased, the focus has shifted to the ramification for the election. For context, the locus of US political risk centers on the prospect of a tight presidential race leading to a lengthy, litigated, and disorderly dispute over the outcome. Now, with investors generally assuming that the West Wing Covid cluster will prove to be a meaningful setback to President Trump’s reelection odds, and a WSJ/NBC poll released over the weekend showing Joe Biden extending his lead following Tuesday’s debate, there has been an incremental shift toward expectations of a clear-cut Biden victory and perhaps even a Democrat sweep. Though some analysts are focused on the potential for higher taxes under a Biden administration and Democrat-led Congress, the prospect for significantly augmented fiscal spending in such a scenario is seen as a stimulative counterbalance. A closely-followed prediction market has reflected rising odds of a Biden win over the past week and is now near its highest level for this election cycle after registering a peak 66% likelihood late last week. Biden thus far has tested negative for Covid-19. The next major campaign event is tomorrow’s Vice Presidential debate, which is scheduled to take place despite safety concerns.
Fed Communications in Focus
Chair Powell is set to speak this morning ahead of tomorrow’s release of the minutes from the consequential September FOMC meeting. Fed Chair Powell will deliver remarks this morning, kicking off the second day of the National Association for Business Economics’ (NABE) 62nd annual conference. He is expected to continue to make the case for more fiscal stimulus amid a cloudy outlook for the economy and may discuss various aspects of the Fed’s shift to average inflation targeting of 2% and the corresponding interest rate projections that were revealed at last month’s FOMC meeting. The minutes of those proceedings will be released tomorrow and they will be closely parsed for any additional insights on the thinking behind the new policy formulation. For context, analysts have been focused on the areas of ambiguity such as the approximate length of time over which the Fed would be averaging the inflation figures, what degree of price pressure over 2% they would be willing to accept, and how the Fed would react to backsliding away from its targets with interest rates already pinned at the zero lower bound. In his speech yesterday at the NABE Conference, Chicago Fed President Evans took an aggressive stance, stressing that overshooting the 2% inflation target is critical and that “the FOMC needs to have an ‘in it to win it’ attitude toward our inflation objective.”
Additional Themes
Pelosi and Mnuchin Set to Meet on Stimulus – With persistent gaps remaining between the House Democrats’ $2.2 trillion version of the next round of pandemic relief spending, which they passed last Thursday, and the roughly $1.5 trillion package supported by the White House, face-to-face talks between House Speaker Pelosi and Treasury Secretary Mnuchin are set to take place today. This morning, Speaker Pelosi reportedly characterized the negotiations as going “very slowly.” From the hospital over the weekend, President Trump redoubled his support for a pandemic relief bill via Twitter, calling for both side to “get it done” but did not offer any compromise to break the deadlock. Even if the two sides were to agree, the Senate might pose a final obstacle to bill, given that Majority Leader McConnell has warned that he will only bring a vote to the floor if a majority of his Republican caucus supports it.
ECB President Lagarde Talks Stimulus – In an interview with the Wall Street Journal, European Central Bank (ECB) President Lagarde reiterated her warnings about the durability of the EU economic recovery amid pockets of Covid-19 resurgence. She emphasized that the ECB stood ready to “use all the tools,” including interest rates and asset purchases, to counter the risk of a double-dip recession. Recently, ECB officials, including President Lagarde, have focused on the strength of the euro as a headwind in their reflationary efforts. The euro is flat this morning following Lagarde’s remarks but remains near more than two-year highs versus the dollar.