Dollar Bleeding Stanched as Markets Search for Direction

Despite efforts by some key players, a stimulus package before the election appears doomed. House Democrats were told not to expect any vote this week and comes after Senate Republicans rebuffed President Trump’s call for an even larger package than the $2.2 trln that the House Democrats are offering. As we expected, Senate Republicans remain unwilling to offer anything more than the $500 bln skinny bill they passed last month. As such, any compromise reached between the House Democrats and the White House will be rendered moot. Talks between Pelosi and Mnuchin are said to continue this week but we remain pessimistic that any workable deal will be reached.

With a Biden victory now accepted as the base case for most observers, the Senate has become the greatest source of uncertainty. As it stands, betting markets are ascribing odds of just over 60% for a Democratic takeover, down from near 70% a couple of weeks ago. Biden’s odds of victory are still over 65% according to betting markets. To state the obvious, a Republican-led Senate would likely stymie many initiatives put forth by the Democrats, including aggressive fiscal stimulus. This would not be taken well by the markets.

The Fed’s Barkin and Daly speak. Last week, Fed officials kept pressure on Congress and the White House to provide more fiscal stimulus. For now, that appears unlikely and markets shouldn’t expect the Fed to come to the rescue. Indeed, one could posit that monetary policy in the US has effectively reached its limits. The Fed can keep rates low but it simply cannot replace the lost income for the tens of millions still unemployed and collecting limited benefits.

A big data week for the US kicks off with September CPI today. Headline is expected to rise a tick to 1.4% y/y while core inflation expected to remain steady at 1.7% y/y. PPI will be reported tomorrow, with headline and core inflation expected to accelerate to 0.2% y/y and 0.9% y/y, respectively. If price pressures continue to accelerate, this could provide further fuel to the recent curve steepening trade. September real average earnings will also be reported today.

2020 Senate Control

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UK jobs data came in decidedly downbeat even though the furlough scheme has not yet ended. The 3-month unemployment rate through August rose to 4.5% and employment declined by -153K, both much worse than expected. The numbers still reflect the life-support measures for the UK economy, meaning that the country should brace itself for an even sharper worsening of the jobs markets in the months ahead. The new wage subsidy program should help, with the government covering two-thirds of wages in firms forced to shut down due to Covid restrictions (mostly in the hospitality sector). But this will be offset by increasingly stronger restrictions imposed by the government’s new three-tier plan for local lockdowns.

Separately, BOE Governor Bailey said that the bank is not yet ready to implement negative rates. This is in line with our firm conviction that only a major new shock would tip the balance in favor of implementing negative rates. Last week, Governor Bailey warned that the economy is at risk of stalling and vowed to add more stimulus to limit any damage from a second wave of infections. As such, we still think that more easing in the form of asset purchases is likely at the November 5 meeting. Much of the September excitement about negative rates in the UK has been priced out, in line with our view, but not entirely.

German ZEW survey plunged in October. Expectations fell to 56.1 vs. 72.0 expected and 77.4 in September, while current situation came in at -59.5 vs. -60.0 expected and -66.2 in September. Eurozone expectations also plunged to 52.3 from 73.9 in September, which along with the German expectations reading are the lowest since May. Clearly, the rise in the virus numbers is taking a toll on confidence in the region. We fully expect the ECB to add more monetary stimulus. The bigger question is whether we can expect more fiscal stimulus as well.

BOE Pricing, 2020

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Press is reporting that Japan Prime Minister Suga will instruct his administration to compile a fiscal stimulus package before year-end. The measures will reportedly focus on boosting tourism and restaurant industries that have slumped due to the pandemic. These measures would be financed by a third supplemental budget that will be submitted to parliament in the session that starts in January. There’s no denying the economy would benefit from more stimulus. However, Suga’s popularity has been tumbling and so the stimulus package has likely taken on more urgency. Some speculate that his falling popularity may lead Suga to call for election sooner rather than later.

China reported strong September trade data. Exports rose 9.9% y/y while imports rose 13.2% y/y, both much stronger than expected and continuing the string of strong economic data. The surprisingly high import levels brought down the trade surplus to $37 bln for the month, well below the near $60 bln in the last two months but around the 5-year average. That said, some of the strong import performance could be due to stockpiling by the telecommunications sector ahead of further sanctions by the US. Indeed, imports from Taiwan rose by 36%. On the export side, medical equipment continues to be an important source of growing trade volume.

China Trade Balance, 2016-2020

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Chinese Yuan and DXY, 2020

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Foreign Investor Flows, 2016-2020

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