The Election and Other Stuff

We’ve finally arrived at election week and tomorrow’s results will certainly have an impact on trading not only this week but for some time to come. The one scenario that probably is prone to generate the most volatility would be an inconclusive result on election night. If that were to happen it would lead to thoughts of a contested election that could drag the uncertainty out for days if not weeks. That would generate a flight to safety trade in Treasuries with risk-off selling in equities. A Biden win with the Dems taking the Senate is the scenario that the market has been trading around for the last couple weeks and is most likely to be the result that generates the least amount of volatility. A Trump win probably means the Republicans retain the Senate and that will lead to a risk-on rally with Treasury yields backing up to range highs that have held since March. Also because of the election this week’s FOMC meeting is likely a placeholder with little in the way of new news. The Fed doesn’t want to add to any volatility that the election is likely to bring, and frankly the economy is performing ok with little obvious need to alter existing monetary policy.  It’s not often that the jobs report is the third most important event of the week but that’s the way it is  The current consensus expectation is for 600 thousand new jobs. The gain would represent about 12 million jobs recovered from the 22 million lost.


Treasuries
Treasury Curve Today Week Change
3 Month 0.08% Unch
6 Month 0.10% Unch
1 Year 0.12% +0.01%
2 Year 0.15% Unch
3 Year 0.19% Unch
5 Year 0.37% +0.01%
10 Year 0.86% +0.05%
30 Year 1.64% +0.04%

 

Short-Term Rates
Fed Funds 0.25%
Prime Rate 3.25%
3 Mo LIBOR 0.22%
6 Mo LIBOR 0.24%
12 Mo LIBOR 0.33%
Swap Rates
3 Year 0.278%
5 Year 0.436%
10 Year 0.875%

 

Economic Calendar
Date Statistic For Briefing Forecast Market Expects Prior
Nov 2 ISM Manufacturing Index Oct 55.8 56.0 55.4
Nov 3 US Elections NA NA NA NA
Nov 4 ISM Services Index Oct 57.5 57.5 57.8
Nov 5 FOMC Rate Decision Nov 5 0.00%-0.25% 0.00%-0.25% 0.00%-0.25%
Nov 5 Initial Jobless Claims Oct 31 735k 735k 751k
Nov 5 Nonfarm Productivity 3Q P 5.0% 5.6% 10.1%
Nov 6 Change in Nonfarm Payrolls Oct 600k 590k 661k
Nov 6 Unemployment Rate Oct 7.6% 7.6% 7.9%
Nov 6 Underemployment Rate Oct 10.8% 10.8% 12.8%

calendar icon Top 5 Events for the Week

Nov. 2 — 6, 2020

1. US Presidential Election — Tuesday
2. FOMC Meeting — Thursday
3. October Employment Report — Friday
4. October ISM Readings — Monday/Wednesday
5. Initial Jobless Claims — Thursday

 

1.  US Presidential Election — Tuesday

We’ve finally arrived at election week and tomorrow’s results will certainly have an impact on trading not only this week but for some time to come. The one scenario that probably is prone to generate the most volatility would be an inconclusive result on election night. If that were to happen it would lead to thoughts of a contested election that could drag the uncertainty out for days, if not weeks. That would generate a flight to safety trade in Treasuries with risk-off selling in equities.  A Biden win with the Dems taking the Senate is the scenario that the market has been trading around for the last couple weeks and is most likely to be the result that generates the least amount of volatility. A Trump win probably means the Republicans retain the Senate and that will lead to a risk-on rally with Treasury yields backing up to range highs that have held since March.

 

2.  FOMC Meeting — Thursday

Usually a week with an FOMC meeting leads with that as the top event of the week but not this week with the election firmly holding that distinction. Also, because of the election this is likely to be more of a placeholder meeting with little in the way of new news. The Fed probably doesn’t want to add to any volatility that the election is likely to bring, and frankly the economy is performing ok with little obvious need to alter existing monetary policy. While the Fed would dearly love to see a Stimulus 2.0 bill passed through Congress by now, things haven’t deteriorated to the point that the Fed feels the need to provide some form of additional monetary stimulus.  After the outcome of the election is clear, and the outlook for a Stimulus 2.0 bill, the December 16 FOMC meeting seems a more obvious place for the Fed to step in with more accommodation if they deem it necessary post-election.

 

3.  October Employment Report — Friday

It’s not often, almost never actually, that the monthly employment report is the third most important event of the week but that’s the way it is this week with the presidential election and the FOMC meeting populating a very crowded week. The current consensus expectation is for 590 thousand new jobs versus 661 thousand in September. Those are impressive numbers in almost any other time but now they fall short.  The October gain would represent about 12 million jobs recovered from the 22 million lost in April and May. The fact that job gains are slowing while 10 million remain jobless from the pandemic speaks to the long and grinding nature that will be this recovery. That is why the Fed remains cautious about the economy not to mention the absence of a Stimulus 2.0 bill, and in full accommodative mode while so many remain jobless and the pandemic remains a considerable threat.

 

4.  October ISM Readings — Monday and Wednesday

In addition to the employment report we get two other big October-based economic reports in the form of the ISM Manufacturing Index today and the ISM Services Index on Wednesday. Combined with the jobs report on Friday these three reports will give us a pretty good look at October activity. The ISM Manufacturing Index due later this morning is expected to duplicate the outlook in September. The headline read is expected to be 56.0 versus 55.4 in September. So the manufacturing sector is expected to remain in solid expansionary territory. The ISM Services Index on Wednesday is expected to print a 57.5 versus 57.8 in September, so another near duplicate of the prior month. So in all, the pair of reports is expected to show solid expansion in both sectors and combined with an expected decent jobs report leads us to believe the Fed will pass on this week’s meeting and look to December to decide whether any additional monetary stimulus is necessary.

 

 

5.  Initial Jobless Claims — Thursday

The weekly change in initial jobless claims continues to be the best real-time indicator of how the economy is recovering and the expectation is that while recovering the recovery is getting shallower.  The Bloomberg consensus expects jobless claims for the week ended October 31 to be 735 thousand, down from 751 thousand the previous week.  Continuing claims are expected to be 7.35 million versus 7.76 million the prior week. The trend is headed in the right direction but the slope is shallow and that speaks to the Fed’s concerns that this will be a long and grinding recovery that spans years, not months.

 

 


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Published: 11/02/20 Author: Thomas R. Fitzgerald