- Divided Congress means no big stimulus bill but also means no taxes hikes or legislative overhauls of healthcare and tech
- Stimulative burden now falls solely on Fed but no action is expected today
- Unemployment claims expected to show continued improvement in the labor market
Divided Congress means no big stimulus bill but also means no taxes hikes or legislative overhauls of healthcare and tech — The results of Tuesday’s election have not been finalized, but it appears that Republicans retained control of the Senate. Meanwhile, Democrats maintained control of the House, although they lost some seats and will have a slimmer majority. Those outcomes mean that there will be a divided U.S. government for at least the next two years (until the 2022 mid-term elections), regardless of whether Biden or Trump wins the presidency.
Former VP Biden appears to have the inside track to win the election. However, nothing will be certain until vote counts are finished in the outstanding states of Arizona, Nevada, Georgia, North Carolina, and Pennsylvania. Even then, the Trump campaign launched legal challenges and demands for recounts in some key states, which means a 100% decisive outcome may not be known for a matter of days or even weeks.
The markets yesterday quickly reacted to the apparent outcome of a divided Congress. T-note yields dropped sharply as the idea was shot down of a “blue wave” and a huge stimulus bill. Senate Majority Leader McConnell now has the leverage to force Speaker Pelosi to come way down from her $2.4 trillion demand for a stimulus bill. Mr. McConnell seems unlikely to go above $1 trillion, now that he knows he will continue to be in control of the Senate in January.
There is now a chance for the stimulus bill to pass in the lame-session session of Congress since businesses and individuals need the aid now and there is no point in waiting until January. Indeed, Mr. McConnell on Wednesday called for a stimulus bill to be passed in the lame-duck session. The question is whether Pelosi-Mnuchin-McConnell can reach an agreement on the size and contents of a package.
The stock market on Wednesday reacted bullishly to the results of Tuesday’s election even though there will be no huge stimulus bill in early 2021. Tech and healthcare stocks rallied sharply as Republicans maintained control of the Senate, which means there will be no major legislative overhaul of the tech and healthcare sectors.
Stocks also rallied on expectations that Senate Majority Leader McConnell will be able to block any attempt to raise taxes. The stock market was worried about Mr. Biden’s plan to raise the minimum corporate tax rate to 28% from 21% and to raise the capital gains tax on wealthy taxpayers.
Stimulative burden now falls solely on Fed but no action is expected today — The FOMC at its 2-day meeting that concludes today will feel increased pressure for its monetary policy to succeed since a divided Congress means there won’t be a huge blue-wave stimulus package in early 2021. Instead, there is expected to be a limited-size stimulus bill of at most $1 trillion either in the lame-duck session or in early 2021.
The FOMC today is expected to stand pat as it reassesses the political and fiscal landscape in the wake of Tuesday’s election. The Fed will leave its funds rate target unchanged at 0.00%/0.25%. The Fed will also leave its QE program unchanged at $120 billion per month, with the breakdown of $80 billion of Treasury purchases and $40 billion of mortgage-backed securities purchases.
The Fed today will not release an updated set of macroeconomic forecasts or a new set of Fed-dot forecasts for the funds rate. Those forecasts will come at the Fed’s next meeting in December, which will be a more appropriate time for the Fed to deliver any updated guidance. The markets suspect that the FOMC at its December meeting might give more detailed guidance about what to expect for its QE program.
The Fed will be disappointed that it is not likely to get much more help from Congress on the fiscal stimulus front. However, the Fed will also be relieved that the 10-year T-note yield yesterday fell sharply by -14 bp to 0.76%. With no chance of a massive blue-wave stimulus package, the Fed no longer has to worry that T-note yields might surge above 1.00%, possibly forcing the Fed into the uncomfortable position of considering rate caps.
The federal funds futures market indicates expectations for the funds rate to remain unchanged at its current level year zero at least through 2022. The Eurodollar futures curve, which trades out ten years, indicates that the market begins to discount a +25 bp rate hike in early 2023 but is not fully expecting that rate hike until late 2023.
Unemployment claims expected to show continued improvement in the labor market — The consensus is for today’s weekly initial unemployment claims report to show a decline of -16,000 to 735,000, adding to last week’s -40,000 decline to 751,000. Meanwhile, today’s continuing claims report is expected to show a decline of -556,000 to 7.200 million, adding to last week’s decline of -709,000 to 7.756 million.
Unemployment claims have steadily declined in recent weeks, but are still far above pre-pandemic levels. Initial claims are still 534,000 above the late-February pre-pandemic level, while continuing claims are 6.057 million above the pre-pandemic level.
The market is expecting tomorrow’s Oct payroll report to show an increase of +590,000, which would be weaker than Sep’s +661,000. The Oct unemployment rate is expected to fall -0.2 points to 7.7%. Yesterday’s ADP report of +365,000 was much weaker than expectations of +643,000.
