Politics Makes Way For Policy Decisions

WHERE WE STAND – I’ve relatively little to add this morning that I didn’t mention in yesterday’s brief post-election musings, with Wednesday’s trade largely bringing a continuation of the momentum seen as Trumps victory in the presidential election became increasingly clear through the early hours of yesterday.

Still, I suppose we should be glad that, after 2 politics-related all-nighters in four months, we won’t have to go through this again for another four years!

We did, though, see the odds of a ‘Red Wave’ further increase yesterday, with Decision Desk’s model at one stage assigning over an 80% likelihood to the GOP retaining the House, in addition to having already won the Presidency, and flipped the Senate.

In turn this saw the so-called ‘Trump Trade’ go into overdrive, as participants went ‘all in’ on the idea of a GOP sweep.

Such a trade was, perhaps, most obvious in the fixed income complex, where Treasuries sold-off across the curve, which bear steepened, with weakness most pronounced at the long-end. Benchmark 10-year yields rose around 15bp on the day, while 30s rose around 20bp piercing north of 4.65%. While a degree of this move can be put down to concerns over greater issuance amid a potentially ballooning budget deficit, the selling pressure also reflects a substantial re-rating to the upside of both medium-run growth and inflation expectations.

Yields at these levels, though, are likely to prove attractive, with 2s in particular, trading at 4.25%, looking rather over-sold, particularly when one considers that the FOMC are likely to take rats back to neutral (3ish%) by next summer. Participants, hence, could use this bout of selling pressure as an opportunity to lock in yield before further Fed cuts are delivered.

Meanwhile, in the equity space, the aforementioned upside re-rating of growth expectations proved to be a fillip for small caps, seeing the Russell 2000 jump over 5% higher. At a broader level, sentiment was solid across the board on Wall Street, with the S&P 500 closing at a fresh record high, buoyed by expectations that Trump’s tax cuts will provide a boost to corporate earnings.

Strong earnings growth, along with solid economic growth, and a forceful ‘Fed put’, remain the three main pillars of my long-standing equity bull case. The election result has done nothing to deter me from this bull case and, if anything, has actually strengthened since, given the lighter nature of positioning, and removal of the potential for protracted political uncertainty, likely teeing things up in strong fashion for a rally into year-end.

In the FX space, it proved to be a day of broad-based USD strength, again likely setting the tone for what’s to come in the coming weeks. The greenback, per the DXY, notched its best day in over four years, gaining more than 1.5% against a basket of peers, as the DXY rose north of the 105 handle.

While those USD gains were relatively broad-based, demand was most significant against those currencies most likely to suffer in a potential renewed round of Trump tariffs. Naturally, this led to the MXN, CNH, and EUR leading declines, with the latter also facing headwinds amid a dovish repricing of the ECB outlook, with participants betting that Lagarde & Co shall need to ease policy to a more significant degree, in order to cushion the economy from growing downside risks – certainly, a plausible assumption. The JPY was also a fair chunk softer, continuing to trade as a rates proxy over any other potential drivers.

LOOK AHEAD – No rest for the wicked, as they say, with another busy day lying in wait.

This evening’s FOMC decision takes centre stage, with Powell & Co. set to continue the journey back towards neutral, delivering a 25bp cut to the fed funds rate, an outcome which money markets fully discount. Guidance will continue to point to a data-dependent, meeting-by-meeting approach to policymaking, with a further 25bp cut on the cards at the December confab. Powell shan’t be drawn on any political matters, though incoming President Trump’s proposals will play a greater role in the Committee’s thinking, and economic forecasts, next time around.

Closer to home, the BoE also decide policy. The MPC are set to vote 8-1 in favour of another 25bp cut, the second of this cycle, though are unlikely to offer any overtly dovish remarks, given the inflationary implications of last week’s Budget. That, incidentally, should also see the Bank revise the CPI profile higher throughout the forecast horizon. Today’s 25bp cut is likely to be the last of the year, with the aforementioned Budget having increased the risks of a resurgence in price pressures.

A full preview for the FOMC decision is here, and for the BoE decision is here.

There is plenty else going on today, besides those two main events. The Riksbank are set to deliver a 50bp cut, while the Norges Bank should keep rates steady at 4.25%.

Away from monetary policy, focus stateside will fall on the weekly jobless claims data – though neither print coincides with the November nonfarm payrolls survey week – as well as the preliminary read on Q3 labour costs, and the latest wholesale inventories figure. Participants will also remain attentive to political developments, particularly further signs that the GOP are set to win the House.