US Macro2Markets Outlook: Nearing the end (of the uncertainty vortex)...

Macro

The US data does not seem to be caught in the uncertainty vortex, as recent economic developments have been better than expected for growth. In addition, as long as the election conclusion is not dragged out, there should be an easing of tensions in the market, especially for rates vol. Meanwhile, the lame duck session may end up revealing the true trajectory of the US economy.

The odds of a red sweep are in the driver’s seat with the “Trump Trade” being discounted in various assets (notably out the yield curve). What has been impressive isn’t just the sell-off in rates post the large 50bp first Fed cut in September, but instead the resilience of the broader financial markets to absorb these rate shocks (without a major tightening of financial conditions).

At some point, these rate oscillations matter. For now, given that the election is a binary event, one should remain open minded and potentially expect the opposite (either for the outcome and/or in reaction to the news). Recall that the Fed cut 50bps and rates still went up, so what if we get a red sweep but there isn’t a selloff, but instead dip buyers take over. Stay nimble out there.

Election Impact with Fed Policy Path: Mapping out potential rate scenarios

Given the uncertainty and concerns around the election (and the implications it will likely have on fiscal policy – i.e. the debt bill), we have a rates and Fed Funds rate forecast table linked to the four potential main balance of power scenarios. We think a red wave is getting close to being priced-in, where to push rates even higher there needs to be a clear and potentially landslide victory to elicit a further sustainable move higher in rates. Therefore, on a clear red sweep, dip buyers may emerge if 10s get into the 4.5-4.75% range, whereas a Harris split government likely triggers a decent 10y rally back to 4%. Overall, we expect the Fed to cut twice more in ‘24 for most scenarios, but if the Fed is to skip December, it would be on the back of a clear red sweep.

Special Topic: Fiscal Impact of Harris vs Trump Policies

Although both US presidential candidates are likely to continue to run large deficits and grow US debt outstanding (especially if their parties sweep all branches), the impact of their proposed policies may have different effects on the near-term fiscal trajectory of the United States. At some point soon in the future, the US will need to get its fiscal house in order, otherwise the US runs the risk of debt spiraling even higher (compounded by interest expense and growing entitlement costs) and/or an eventual run on the dollar. In the special section we break down what both sets of policy plans (from each candidate as initially presented/analyzed by the nonpartisan, non-profit CRFB) may mean for long-term debt dynamics, annual deficits, and ultimately, UST supply and rates (via higher term premia). We also explore the current fiscal situation that will be inherited by the next administration.

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