“Is this Heaven? No it's Iowa”

November 04, 2024
6 min read

“Is this Heaven? No it's Iowa”

  • Iowa poll suggests Kamala Harris is leading ahead of tomorrow’s election. USD dives as “Trump trade” unwinds.
  • There are no policy-relevant economic data releases today. Lots of central bank policy rate decisions this week.

USD plunged across the board after a poll by the Des Moines Register and Mediacom showed Kamala Harris with a 47%-44% lead in Iowa and a solid 20 points edge with women in the state. The Poll also showed that independent likely voters, who have supported Trump in every other Iowa Poll this year, now favor Harris, 46% to 39%. The Poll delivered a blow to the “Trump trade” because Donald Trump won Iowa by solid margins in 2016 and 2020.

The macro logic behind the “Trump trade” is that fiscal and trade policies under a Trump presidency are inflationary. This would force the Fed to keep the policy rate restrictive for longer. In contrast, fiscal and trade policies under a Harris presidency are less likely to complicate the Fed’s price stability mandate. This has neutral implications for USD and Treasury yields.

Nevertheless, the presidential race is shaping-up to be a nail-biter and it’s possible we may not know the winner until days later. Meanwhile, Democrats have greater odds of winning a majority in the House of Representatives and Republicans are favored to win the Senate. As such, a divided Congress is the most likely scenario in our view. The political gridlock will make it hard for the next president to implement major fiscal changes, meaning fiscal policy will remain a drag to growth in the next few years.

Irrespective of the election outcome, the U.S. economy is in good shape underpinned by resilient consumer spending activity. Friday’s weak set of U.S. economic data was noise and not a sign the U.S. economy is falling off a cliff. The poor non-farm payrolls gains and unexpected decline in the ISM manufacturing index in October reflect hurricanes and strike activity. Interestingly, the recession signal triggered by the Sahm rule in July is now un-triggered.

The Goldilocks U.S. macro backdrop of solid growth and modest disinflation continue to favor the dollar and Treasury yields. On Thursday, the FOMC is widely expected to dial down the pace of easing to 25bps after slashing the Fed funds rate 50bps in September. In our view, the vote split and Fed Chair Jay Powell’s post-meeting press conference will likely signal that the bar for an aggressive easing cycle is high.

At the September meeting, Governor Michelle Bowman cast the sole dissenting vote in support of a 25bps rate cut. Risk is she votes to keep rates steady this week. Meanwhile, we expect Powell to stick to the message he delivered in October that the “Fed doesn’t feel like it’s in a hurry to cut rates quickly” given “growing confidence” of a soft landing for economy.

There are plenty of other central bank meetings this week:

Tuesday: The Reserve Bank of Australia (RBA) is heavily anticipated to keep the policy rate steady at 4.35%. Risk is RBA Governor Michele Bullock notes during her post-meeting press conference that the Board considered the option of cutting the policy rate. If so, AUD would be vulnerable to a kneejerk drop.

Wednesday: Brazil COPOM is expected to hike rates 50bps to 11.25%. National Bank of Poland is expected to keep rates steady at 5.75%. Bank Negara Malaysia is expected to keep rates on hold at 3.0%.

Thursday: The Bank of England is expected to cut rates 25bps to 4.75%. The focus will be on the MPC vote split, updated macroeconomic projections, and monetary policy implications from the fiscal loosening measures in the U.K. government Autumn Budget 2024.

The Norges Bank is widely expected to stand pat at 4.50%, in line with its September guidance. The Riksbank is seen slashing rates 50bps to 2.75%. The market implies an 80% probability of a jumbo cut. In our view, the market is overpricing the risk of a 50bps cut because underlying inflation is stabilizing around the 2% inflation target. Peru central bank is expected to keep rates steady at 5.25%. Czech National Bank is expected to cut rates 25bps to 4.0%.

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