Blain’s Morning Porridge 14th Oct 2024: US Rates, The Election and Rising Doubts
“Après moi, le’deluge!”
This is shaping up as another tense week on the ongoing uncertainty of the US Election. Harris or Trump? Equally important – will either win the whole suite of White House, Senate and Congress, avoiding political gridlock, but potentially unleashing a deluge of uncertainty on the US Bond market?
Last week there was another judder moment in US Treasuries as a strong Weekly Jobs report and stubborn inflation indicators roiled the bond market – reversing hopes for a soft-landing. The underlying economic strength and resilience of the US economy puts the recent 50 bp Fed ease in a curious light: Too aggressive? Unnecessary? An overplayed hand? Traders are now scaling back the expectations of further interest cuts in the US – the consensus is now for two small 25 bp cuts into early 2025.
At its simplest it makes the Fed’s recent 50 cent ease look overdone: the US economy looks stronger and more resilient than the Fed had apparently thought. What if they’ve got the fundamental direction of the economy and the need for US interest rates easing wrong?
I suspect last week’s rise in bond yields was just a tremblor, a foreshock, hinting at wider shocks on interest rates to come. Instead of the gentle path towards further easing – which the market had blithely assumed – what if the trend reverses towards higher rates? After meetings with clients last week, I placed my first bet on the next Fed Hike last week – I plumped for the possibility the Fed may be hiking rates by Q3 next year. It’s a non-zero probability.
Why my bearishness? “Events, dear boy, events…” and consequences could be trending that way.
If I’m right – that the US economy is in better shape than the political miseryguts are selling, is strongly placed for a rebound, and global events could spell supply chain and energy inflationary pressures, then the Fed is going to look somewhat embarrassed by the last ½ point cut – which could spell disaster for Jerome Powel. If Trump wins the White House, it may become the excuse to defenestrate him and replace Powell with a new, more biddable Fed Chair. The prospect of a cowed Fed kowtowing the Trump line could unsettle markets even more than a Trump win would have already have done!
Put the uncertain US election, global tensions, geopolitics and the general sense of “something don’t feel right” together, and then it’s clear the current path of events seems to be trending towards the chaotic. Don’t leave anything off the table. The path of US rates depends on three factors, aside from just the strength of the economy.
The first is the US election. The presidential race remains tied. Most scenarios playout with neither Trump or Harris seizing the Oval Office and control of the Senate and Congress – meaning gridlock would curtail either from enacting their wilder election promises. However, a number of scenarios show the possibility of Trump winning both as somewhat higher than Harris. (The Republicans look most likely to win the Senate by nearly 10 points.)
Trumps plan is to fund the economy from tariffs which will likely juice inflation and further weaken supply chain resilience. As someone recently wrote – Trump will kill trade with China. It’s not just me thinking it. Goldman released a report in September warning about the impact of Trump’s policies on the economy from tariffs and sending back illegal workers, while others have commented on the effect on bond buyers of the burgeoning deficit and higher borrowing. Trump is proposing to slash corporate taxes and maintain previous tax cuts through tariffs.
This morning the Wall Street Journal reports “Inflation, Deficits Will Be Higher Under Trump Than Harris”: citing a survey of leading economists. 68% say Trump will trigger higher inflation vs only 12% saying Harris. The key issue for US rates and bond markets post-election will be inflation – how much would inflationary expectations rise under Trump or Harris, and what will the real world effects be?
The second issue is the possibility of a “Liz Truss” moment for the US economy post the election. While the World is now very used to hearing what Donald Trump says and hearing it through the filter of “he can’t be serious, so I will pretend I did not hear that”, once he is back in power.. that changes. My Republican chums assure me Trump will be constrained, measured and statesmanlike – with a competent Treasury Secretary overseeing the economy.. (They’ve been spouting that kind of BS since 2016, when I was assured Trump was an aberration never to be repeated…) Nope. He owns the Republican Party. He will not be constrained – he will say what he will say.. and the likelihood is he will shock us and markets. It’s a high non-zero probability.
The third factor is Central Banks themselves. They are acutely aware of the rising sense of global instability around conflict, political uncertainty and the real economy. They are also keen to re-establish interest-rate discipline – removing the crutch of ultra low interest rates that dominated the Post-Global Financial Crash QE Era. They want a period of normalised real-interest rates above inflation to unravel the distortions caused by QE – that setting the risk-free-rate too low mispriced risk across the whole economy, artificially boosting the price of speculative assets and the stock markets in particular! Doh!
Keeping rates high will allow Central Banks to aggressively ease into a crisis – as they did in 2008. The trick will be not to send all the wrong signals about the Fed Put and Central Banks role being to rescue broken markets – which is something most folk under 45 in these markets sort of assume will happen if things turn bad again. If the Moral Hazard of bailing out markets is going to become an issue again.. the Fed will be wanting to have an instrument with clout.
Meanwhile, I suspect the Fed will have a weather eye on Boeing.
I am wondering if the imminent collapse of Boeing to junk credit risk, in what Bloomberg perfectly describes as Boeing’s “Endless Doomloop” could become a trigger for a wider corporate debt/confidence crisis – just as the collapse of levered CLOs in 2007 became the trigger for the GFC?
Boeing is not the only highly indebted, badly managed, firm in the US. But it might just be first to jump and start a trend.
Boeing looks a firm in a death spin – not a good thing for an airliner manufacturer. Its’ delivery schedules and safety culture are even less reliable than British Airway’s flights(!). Its’ airline clients are furious at missed deliveries hitting their bottom lines. It’s embroiled in a damaging strike with its workers – yet it’s just announced 10% job cuts across the firm – hardly a sign of confidence it wants to negotiate its way back into profitability. Its’s space business is an embarrassing saga of astronauts marooned on the ISS, while Musk’s Space-X is successfully landing its new Super-Heavy lifter.
The new CEO, Kelly Ortberg managed to screw up from the get-go, trying to negotiate directly with striking workers showed his Marie Antionette approach to the business. He was rebuffed. How he thinks sacking workers in a firm where the pride of these workers is critical to restoring its production lines and reputation for safety. That seems insane. Ortberg was chosen for the most difficult CEO job in the USA because he’s an engineer, and the worst possible choice would have been a Jack Welsh management clone.
The jury is out on Boeing.
Not that it is much to do with markets – except to illustrate the value of investing in Sports – I posted a separate comment on the America’s Cup yacht racing earlier this morning…)
Tomorrow I am going to try and take a look at the political consequences of Alex Salmond, the former leader of the SNP who passed away over the weekend. I think he was wrong about Scottish Independence. I’d always favoured the completion of Scotland’s Reverse-Takeover of England as the best thing for my homeland. Alex Salmond was deeply flawed, but he was a very effective political communicator, and he changed the whole UK completely.
Out of time, and back to the day job…..
Bill Blain
Author of the Morning Porridge, founder of Wind Shift Capital
