Week Ahead: US Election Special

The US Presidential and Senate elections will be the main event in the week ahead, but we’ll also be keeping an eye on meetings of the Federal Reserve and Bank of England.

Election 2020

The only show in town (almost) is the US Election on Tuesday. Whilst a result would normally be expected soon after polling booths close, no one is terribly sure when we will know who the next incumbent of the White House will be. Joe Biden holds a commanding lead in the polls at a national level, but it’s closer in the key battleground states that will determine the winner. Donald Trump could yet surprise the pollsters. Meanwhile in the Senate race it’s just as close and could be just as important for the market’s view of getting a stimulus deal done soon after.

Favouring volatility in futures pricing and potentially in some FX markets overnight will be the way in which calls on individual states are made. With some states processing the in-person ballots before the postal ones are counted, and with some states allowing postal votes to arrive after Nov 3rd (as long as they are postmarked by this date), we could get an inaccurate and uneven sample when the West Coast polls close. If there is no clear result or a contested outcome we can expect volatility to rise again.

We’re hosting a special pre-election webinar on Monday and will be tracking the market reaction live on Wednesday.

Federal Reserve

Hot on the heels of the US election on Wednesday comes the November two-day meeting of the Federal Open Market Committee (FOMC), at which policymakers are not expected to announce any major shifts. Markets will be looking for additional clarity around how policymakers are approaching the new average inflation target framework. Minutes from the September meeting stressed that while rates will be lower for longer, officials are keen to maintain a degree of flexibility on forward guidance and don’t want to commit unconditionally to keeping rates on the floor. The FOMC statement and press conference with Jay Powell will take place on Thursday.

Bank of England

Ahead of this on Thursday, the Bank of England will issue its latest monetary policy statement amid expectations that rates will go negative. The Bank of England is laying the groundwork for a descent into negative interest rates. In a letter sent to commercial banks on October 12th deputy governor Sam Woods asked firms to detail their “current readiness to deal with a zero Bank Rate, a negative Bank Rate, or a tiered system of reserves remuneration – and the steps that you would need to take to prepare for the implementation of these”. The letter notes that “the financial sector … would need to be operationally ready to implement it in a way that does not adversely affect the safety and soundness of firms”, and explains that “the MPC may see fit to choose various options based on the situation at the time”. It comes after details from the last policy meeting showed that the BoE is actively considering negative rates, whilst Andrew Bailey has been at pains to stress that this does not necessarily mean they will take that route.

There is clearly a debate within the Bank’s Monetary Policy Committee (MPC) going on right now that we are seeing play out in public. In September deputy governor Dave Ramsden issued a note of caution only a day after Silvana Tenreyro pointedly backed negative rates. It looks as though there are some clear ideological disputes among rate setters that needs to be worked out over the autumn, implying as Andrew Bailey has suggested that negative rates are not on the near horizon, albeit they are being considered actively. The problem for the Bank would be fresh lockdowns and/or an unemployment crisis heading into Christmas that could put pressure on the MPC to act.

RBA

The Reserve Bank of Australia could well cut interest rates for the first time since March when it convenes this week, with markets increasingly expecting a reduction in the cash rate from 0.25% to 0.1%. The RBA left interest rates on hold in October, refraining from a cut below 0.25% but maintaining a decidedly dovish bias that still indicates a further cut may occur this year. The RBA said it will keep monetary policy easy “as long as is required” and will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3% target band. It kept its options open and stressed that it will continue to consider additional monetary easing.

Economic data

Most if not all the economic data is out of date due the reappearance of the virus and restrictions, as well as the political landscape in the US likely changed even if Donald Trump remains president. Nevertheless, the markets will be watching the latest PMIs and nonfarm payrolls for the US.

Top Economic Data This Week

Open the economic calendar in the platform for a full list of events.

Top Earnings Reports This Week

Don’t forget to tune into XRay for more updates.