Morning Commentary: Doing the Right Thing, After Trying Everything Else

A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.

Doing the Right Thing, After Trying Everything Else Share this story: Andrew Kositkun Foreign Exchange Head Trader

A key story in the markets is the growing support for a bipartisan stimulus package that could be enacted as early as Dec. 11. The latest developments include Treasury Secretary Steven Mnuchin re-entering talks with a $916 billion proposal and Senate Majority Leader Mitch McConnell suggesting that each side drop their top priorities. For the Republicans, this would be liability protections, and for the Democrats, this would be aid to state and local governments. Overall, recent signals have been encouraging but many hurdles remain to a quick deal. The economy clearly needs another stimulus package. While the unemployment level has fallen, it is still 6.7%, with unemployment benefits set to expire this month. Small businesses are also struggling, as PPP funds have run out, and targeted shutdowns and cold weather drag on activity. Of particular concern are the brick-and-mortar stores, restaurants, bars and other businesses that can’t move activities outdoors. The first hurdle to a quick deal is the trend for Washington, D.C. compromise to come only after acute pain from the markets or the economy. Thus far, the markets continue to be supported as investors look through the near-term risks and focus on the more positive spring outlook. Ironically, the market’s positive outlook likely includes the assumption of additional fiscal support. As for the economy, economic data continues to trend lower, but the pace of this decline is not alarming. Case in point, last month’s non-farm payroll jobs report of 245,000 new jobs represented a greater than expected decline but was not a bad enough miss to upset the markets. The second challenge to a quick deal is the time of year. Normally, it is difficult to get anything done during a lame-duck session of Congress. Adding to the challenge is the incomplete 2020 election, as both U.S. Senate seats in Georgia head to runoff elections. Market odds for the Democrats winning both seats remain low but have improved. This low but increasing probability could play a role in the perceived negotiating strength both sides have. Finally, there is the issue of the actual package. There is general agreement that the fiscal stimulus bill should include an extension of unemployment benefits, another round of PPP for small businesses, and money for healthcare and vaccine distribution. However, significant differences remain on funding for state and local governments as well as liability protections for businesses. It should be noted that both House Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer have been critical of McConnell’s latest proposal for each side to drop its top priority. But there are also reasons to be optimistic. Both sides have shown an increased willingness to pass stimulus in stages or, at a minimum, extend provisions that will otherwise expire at year-end. Additionally, there is increased pressure from governors in blue and red states to get things done. This pressure increases the chances for a short-term package to get through the winter should negotiations on a bigger comprehensive deal drag on. HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT: U.K. Prime Minister Boris Johnson and European Commission President Ursula von der Leyen will have dinner tonight in hopes of striking a breakthrough on stalled negotiations. Many issues remain unresolved, with the U.K. saying the EU’s proposal on fisheries and on fair competition rules is unacceptable and Chancellor Angela Merkel stating that Germany was preparing for a no deal. Nevertheless, markets are still expecting a deal, and the fact that the U.K. has dropped controversial sections from its Internal Market Bill yesterday is clearly a positive development. Poland and Hungary agreed to a compromise with Germany that paves the way for approval of the EU’s $2.2 trillion budget and stimulus plan. The Bank of Canada left its policy rate unchanged at 0.25% as widely expected. China’s consumer price index fell 0.5% year over year, as consumer prices fell for the first time in over 10 years. While the Chinese economy has been performing, deflation risks is a key reason why normalization will follow a gradual path.

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