US Macro2Markets Outlook: US Election & Macro Crossroads

Macro

Our “bumpy landing” view is back on the list of potential macro outcomes. Concerns over labor market health and a consumer-led slowdown are again front and center for some market participants. Based on prior experiences, heading into year-end is when conditions likely go non-linear and things begin to break both in the macro data and financial markets. Short of big Fed cuts, policy solutions are limited given the timing of the election too. As we navigate, avoid falling into the trap that disinflation is a sign that all is well.

Markets

As the dust settles post one of the most active macro weeks of the summer, the broader market is at the mercy of lower summer liquidity amid ongoing positioning realignment versus potential political and geopolitical shocks. The macro will still matter on the margin as we have a couple CPI and NFP prints plus the Fed’s August pitstop at Jackson Hole (and the minutes before it). That said, given how much is now priced into Fed Fund futures and how much rates have rallied, we expect some retracements before the first cut in September. Meanwhile, summer seasonals might have been pulled forward.

After calling for a return of the “bumpy landing” narrative and thus lower rates, we are tactical here as there is a lot priced into the money market strip and forwards. We also need to be open-minded and not one-sided when it comes to discounting the upcoming election. Even if the so-called “Trump trades” return back in favor (or the optics of curve steepening and sector rotations in stocks might get that sort of attribution) we argue to be careful as it can be just a narrative and not end as the final resting point for markets. Meanwhile, the market will likely need time to formulate the “Harris trades.”  Lastly, long vol might become interesting soon, but we’ll need more stimuli…

Special Topic

Politics & election outcomes through the lens of the economy & markets: We turn our attention and focus towards establishing a framework for the upcoming US election. We provide some historical political context of party outcomes at prior elections, as well as party composition election scenarios for 2024. We also discuss market moves post recent political developments.

From an economic perspective, inflation remains a major concern for the US voters and will likely continue to be harped on during campaign leading up to the election. In addition, high budget deficits will be another focus point. Thus, inflation premium and term premia on the curve (and the potential for a weaker US dollar) will in turn be the market’s focus. We stress that a lot can (and will likely change) as we learn more about each candidate’s platform.

Please see the PDF report link above for the full write-up with charts and forecasts…