Morning Commentary: Animal Spirits

Foreign Exchange - Morning Commentary
Animal Spirits
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
The economy and the outcome of the presidential election are deeply intertwined not only because of potential policy measures but also the potential for a shift in animal spirits.  On policy, the potential implications extend beyond legislative action as much can be done through executive actions on trade, regulations and COVID-19.  Nevertheless there are many issues that require Congressional approval so the outcome of Congressional races and whether any party has a sweep remains important.  Clearly, it is easier to make budget expansions under a united government—either Dem or Rep— than under a divided one.  A Biden presidency with a Republican-controlled Senate is likely the most fiscally restrained outcome. 
Below is an overview of the key issues facing the US economy and the economic implications under the different administrations.

COVID-19: Biden and Trump appear to differ most over the involvement of the Federal government in fighting the virus with Biden supporting federal coordination and Trump deferring to local authorities.  Based on experiences abroad, countries with strong testing, tracing and quarantining programs have been more successful controlling the virus and limiting the economic damage.  Extrapolating from this, Biden’s virus plan would be more effective for the economy. 

Taxes and Stimulus: Higher corporate and personal taxes under Biden could be a headwind to investment and spending.  However, the emphasis on supporting the welfare of the middle class through education, job training and lower student debt should lead to long term benefits.  Both candidates support bringing back manufacturing jobs and infrastructure investments leading to similar economic effects.

China and Trade: Both agree on a tough on China stance meaning further escalation regardless of who wins, but the tactics are different.  Biden likely attempts to create an international coalition to pressure China and is not an advocate of tariffs, which has been Trump’s primary tool.  The two differ over the trade war with the rest of the world.  Therefore, a second Trump term likely continues the trade war with the rest of the world and leads to greater uncertainty and hits to corporate confidence. 

Regulations: Biden’s policies likely encourage greater regulation that could weigh on productivity growth. 

The Fed: The Fed Chair and Vice Chairs’ terms end during the next presidential term. Biden likely keeps Powell as Chair as keeping Fed leadership in tact has been the norm historically.  Trump had been critical of Powell but has since praised the Fed’s response to the current crisis raising the chances Powell remains.  Ultimately, the most important consideration is maintaining independence of the Fed.  

Confidence:  The election will also impact the economy through shifts in sentiment.  Confidence levels will not only stem from the legislative agenda but also from how the president handles the COVID crisis and the trade war.
  • The House is set to hold a vote on a bill to protect the Postal Service this Saturday.  What remains to be seen is what else they do.  Speaker Pelosi has been steadfast in her opposition to breaking up the stimulus package and thinks that the Democrats have conceded enough with its willingness to cut off $1 trillion in demands.  Despite this, there is growing pressure from within Democratic ranks to restart talks. 
  • US PMI data came in better than expected with manufacturing and services PMI coming in at 53.6 and 54.8, respectively.  
  • Eurozone PMI data for August disappointed market expectations as the composite number dropped 3.3 points to 51.6, missing market expectations for a 55.0 print.  The bulk of the miss came from services, which dropped 4.6 points to 50.1.  Adding to the concern was the weakness from forward looking components given its overwhelming weight in the economy.  The manufacturing component dropped 0.1 points to 51.7.  Overall, today’s print reflects higher frequency data that shows that we are past the post lockdown technical rebound.  Look for the ramifications of a weak job market and consumer sentiment to be more apparent in the detailed release scheduled for August 28.
  • On a country level, divergence across European countries/sectors continues.  European countries continue to experience significantly different health situations which has exacerbated the divergence in economic momentum as today’s country level PMI data shows.  Germany appears to be fairing the best with its composite PMI missing estimates but still coming in at 53.7 and outpacing France.  However, outside the “big 2,” output in Europe decreased.  Today’s weakness in Europe illustrated the impact of renewed restrictions and underscores how difficult the re-opening process is even for areas that have flattened the curve.    
  • The latest round of Brexit talks ended on a pessimistic note although this isn’t much of a surprise given previous rounds.  On the EU side, its top negotiator has been quoted saying, “at this stage, an agreement between the U.K. and the EU seems unlikely.  Too often this week it felt as if we were going backwards more than forwards.”  For the UK’s part, its top negotiator was a bit more optimistic but conceded that it is clear that a deal would “…not be easy to achieve.”
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