Democratic control of Senate shifts the investment landscape
U.S. initial unemployment claims expected to show more backsliding
U.S. ISM services index expected to decline but remain in solid territory
U.S. trade deficit expected to widen to 16-year highDemocratic control of Senate shifts the investment landscape — The markets on Wednesday reacted as the Democrats Warnock and Ossoff both won the run-off elections for Georgia’s two Senate seats, thus giving Democrats full control of Washington starting on January 20. NBC and CBS called the second Georgia Senate seat race for Jon Ossoff just after 4 PM ET on Wednesday. The markets largely shook off the mid-day disruption of the Congressional certification of the Electoral College vote when protesters stormed the Capitol.
The S&P 500 index on Wednesday closed +0.57% as investors seemed to be happier about the likelihood of another big fiscal stimulus package by February or March than they were worried about President-Elect Biden’s campaign agenda for a hike in the minimum corporate tax rate to 28% from 21%. However, the Nasdaq 100 index took a hit of -1.40% on worries that tighter control of the tech behemoths is on the way.
Meanwhile, inflation expectations moved farther above the Fed’s 2.0% inflation target. The 10-year T-note yield easily pierced the psychological 1.00% level and closed the day sharply higher by +8 bp at a 9-3/4 month high of 1.04%. The Treasury market will now be called upon to finance another big dose of fiscal stimulus, and the national debt will continue its meteoric rise.
The dollar was buffeted by various cross-currents but found some support on the sharp rise in U.S. interest rate differentials. The dollar index posted a new 2-3/4 year low but then recovered to close the day little changed.
The fact that Democrats now have control of the Senate through Vice President-Elect Harris’ tie-breaker vote does not mean they will have carte blanche to pass whatever legislation they want. First, Democratic leaders in both the House and the Senate will have to hold their own caucus together in formulating new legislation. Second, they will likely only be able to pass budget and spending-related legislation that can bypass the filibuster process since Democratic Senator Manchin (D-WV) has said he will not support doing away with the filibuster.
Democrats are expected to use the filibuster-proof budget reconciliation process to pass a big stimulus package in February or March that will likely include more pandemic aid, the remainder of $2,000 stimulus checks, and possibly clean energy and infrastructure spending. However, legislation that is not budget or spending related will be blocked by Republican filibusters, unless Democrats can prevail upon Senator Manchin and any other hold-outs to deep-six the Senate filibuster rule.
The fact that the Senate seats will be split 50-50 will also hamper the freedom of Democrats to operate. There are no hard and fast rules about how the Senate will operate with a tied number of seats. Senate Majority Leader McConnell indicated that he is willing to negotiate with Chuck Schumer about some type of power-sharing agreement. The Democrats are likely to eventually get their way in the Senate, but the Republicans with a 50-50 seat tie will have more opportunities to obstruct and slow the Democratic agenda.
Senate Committees may be set up with 50%-50% membership, with any tie votes going to the Senate floor for a vote, thus taking up more time. Vice President-Elect Harris, in her Constitutional role as the President of the Senate, will be very busy over the next two years trying to maintain order in the Senate.
U.S. initial unemployment claims expected to show more backsliding — The consensus is for today’s weekly initial unemployment claims report to show a +16,000 to 803,000, reversing most of last week’s -19,000 decline to 787,000. Continuing claims are expected to show only a small -19,000 decline to 5.200 million, adding to last week’s -103,000 decline to 5.219 million.
The recovery in the U.S. labor market has clearly stalled due to the recent pandemic surge and the increased restrictions across much of the country. Indeed, yesterday’s Dec ADP report fell by -123,000 jobs, showing a much weaker labor market than expectations of +63,000. Looking ahead, tomorrow’s Dec payroll report is expected to be weak at +73,000, which would be the smallest rise since the labor market recovery began in May.
U.S. ISM services index expected to decline but remain in solid territory — The consensus is for today’s Dec ISM services index to fall by -1.4 to 54.5, adding to November’s -0.7 point decline to 55.9. Despite expectations for a decline, today’s expected index level of 55.9 would still be relatively strong and would indicate an expanding U.S. service sector. Tuesday’s Dec ISM index for the manufacturing sector was surprisingly strong and rose by +3.2 points to 60.7.
U.S. trade deficit expected to widen to 16-year high — The consensus is for today’s Nov trade deficit to widen to a new 16- year high of -$67.3 billion from October’s level of -$63.1 billion. The trade deficit is now nearly 50% wider than the -$43 billion level seen when President Trump took office in January 2017.
The U.S. trade deficit this year has plunged mainly because the pandemic caused exports to drop much more quickly than imports. In November, U.S. exports were down -13.5% y/y, while imports were down by a lesser -3.3% y/y. The widening deficit is an underlying bearish factor for the dollar as unwanted trade dollars overseas are dumped into the global FX markets.