Sat, Nov 28, 2020 @ 08:33 GMT
Home Contributors Fundamental Analysis Nov 3 'Double Header' to Keep A$ on Backfoot?

Nov 3 ‘Double Header’ to Keep A$ on Backfoot?

The prospect of a huge RBA policy move coming just hours before polls close in the US on November 3 adds to the risks that this “Double Header” event may yet push the A$ below 0.70, at least in the short term, though record Chinese steel production driving strong iron ore prices plus a rising RMB may limit any dips.

Global markets appear to be taking a ‘wait and see’ approach to the US Presidential election which is now less than two weeks away. And even with rising optimism that another round of fiscal aid for beleaguered US households may not be too far away, the S&P500 is down about 0.5% over the last week.

US House Leader Nancy Pelosi was quoted as saying they were “just about there” on resolving a key relief package with Treasury Secretary Mnuchin though its very clear that Senate Republicans will take a lot of persuading to support the roughly US$2tn deal.

However, the US bond market clearly seems to be reacting to record debt levels. The US Budget Deficit hit 16% of GDP in the year to September, and announced late last week, that’s the largest deficit since 1945 and the prospect for much more expenditure to come if we see a “Blue Wave” of support for Biden and the Democrats has pushed bond prices down and yields higher this last week.

US 10yr yields have hit 4-month highs and the spread between 2yr and 10yr yields, which captures expectations of economic growth, inflation and debt issuance, has hit the highest closing level since early 2018.

A Democratic sweep scenario would arguably tip the scales to much larger and more comprehensive fiscal support. Biden’s campaign has signalled a potential two-stage approach if current stimulus negotiations fail: an initial “down payment” in Biden’s first 100 days to tide over the economy, likely in line with the Democrats’ existing $2.2trn plan. This would be followed by the $3trn Build Back Better four-year plan later in 2021, comprising infrastructure, clean energy investment and increased spending on low income housing, health and education.

Biden’s planned $3trn lift in taxes over a decade, falling mainly on high incomes, corporates and capital gains, means the net fiscal stimulus remains substantial thanks to $7trn+ in planned 10-year spending.

However, while bond markets appear to be leaning towards pricing more risks of a ‘clean sweep’ for Democrats, polls appeared to have narrowed slightly ahead of the second and last US Presidential debate, so which candidate ‘wins’ and what impact that it has on polls will be important for bond and equity investors next week.

Here in Australia, the other part of that November 3 “Double Header” has become increasingly important. In what Westpac’s Chief Economist Bill Evans has been calling a “Game Changer” policy meeting, the RBA looks set to announce sweeping changes including a cut in the cash rate, the 3yr target bond rate and the rate on the term funding facility from one quarter of 1 percent or 25bps to 1/10th of 1 percent or 10bps.

Bill also thinks the RBA will cut the rate on exchange settlement accounts where banks can deposit cash at the RBA to 1/100th of 1 percent which could see markets begin to intermittently trade negative interest rates here in Australia.

And Bill also expects the RBA to announce a significant move in its bond purchase program to one of purchasing Australian government bonds and semi government bonds, across the curve, including maturities in the 5 – 10-year range.

Such a move would bring the RBA more into line with other Central Banks like the Fed, Bank of Japan, ECB etc and that was one factor that drove the Australian dollar down to a 4 week low on Tuesday at 0.7021.

The RBA did note in the minutes from the September meeting released Tuesday that “a lower exchange rate would provide more stimulus to the Australian economy in the recovery phase” and RBA Assistant Governor Chris Kent noted that “lower returns on Australian dollar assets contribute to a lower exchange rate”.

So the prospect of a huge RBA policy move coming just hours before polls close in the US on November 3 adds to the risks that this “Double Header” event may yet push the A$ below 0.70, at least in the short term though record Chinese steel production driving very strong iron ore prices and a rising RMB may limit any dips.

Now the focus next week in global markets will of course remain on US politics and fiscal support. However, we do also the advance read on Q3 GDP in the US which could print at a 30+% rise in annualised terms, fully reversing the 31.4% drop seen in Q2.

The news in Europe has been much less positive though with increasing concern over the persistently rising COVID case counts, not just in Spain and France but also Italy, Germany and across all the Eurozone. Thus, ECB President Lagarde should add to the sense that further easing from the ECB might not be that far away.

Here in Australia, Q3 CPI is released Wednesday. Westpac expects the headline rate to surge 1.1% on a rebound in childcare and jump in fuel being in part offset by grants for dwelling construction which would lift the annual rate to 0.3% from -0.3%. The trimmed mean though is expected to be flat on the quarter though, taking the annual rate down from 1.2% to 0.8%, a new record low for this measure of inflation.
Event risk

China Fifth Plenum (Mon-Thu); Senate confirmation vote for judge Amy Coney Barrett, German Oct IFO (Mon); US Sep durables, China industrial profits (Tue); Australia Q3 CPI (Wed) BoJ, ECB policy meetings, US Q3 GDP advance plus initial claims. Facebook, Amazon, Apple and Twitter report Q3 earnings (Thu); Europe Q3 GDP, Oct CPI and Sep unemployment. US Q3 employment cost index and Sep PCE (Fri) China Oct CFLP PMI (Sat)

Westpac Banking Corporation
Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.

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