Macroeconomics: The Day Ahead for 5 November

A relatively light schedule of statistics, the as expected no change RBA rate decision and some ECB speakers offer some distraction from election day in the USA, which will keep trading volumes quite subdued. There are UK BRC Retail Sales, French Industrial Production, Spanish Unemployment, Indonesian Q3 GDP and MENA Non-Oil PMIs to digest, while ahead lie Services PMIs/ISM and US and Canadian Trade. Lagarde heads the run of ECB speakers as EU Finance Ministers meet, and the Bank of Canada publishes minutes from its latest policy meeting, at which it cut rates 50 bps. The US and UK sell 10-yr, and Austria 10 & 20-yr.

** U.S.A. – October Services ISM, Elections **

– The Services ISM is forecast to drop back to 53.8 from 54.9, with hurricane related disruption expected to be a drag, though survey responses are generally collected in the final few days of the month, which suggests a more limited impact. As for the selections, if polling is correct (far from assured), then there is little to choose between Harris and Trump in any of the seven swing states, even if Harris has surprisingly taken the lead in Iowa, though markets are clearly discounting a much higher chance of a Trump win, and a potential ‘red’ (Republican) sweep in Congress. But given that polling tightness, it may be well into Wednesday before the outcome is clear, and with more than 200 state and supreme court legal cases disputing the election outcome and methodology waiting in the wings, and the likelihood that Trump will not accept anything other than victory for himself and the Republicans, the potential for a very ugly and protracted outcome, potentially marred by violence looks to be highly elevated, and obviously raising even more doubts about the future of democracy in the US (though many parts of Europe also under the same cloud). Volatility in markets is all but assured, given the skew in expectations and a high probability that initial exit polls may well be confounded by the already high volume of early votes cast (75 million). The initial market reactions will focus on a) differentiated outlooks for tariffs, with China clearly impacted more by a Trump win, though the EU is in many ways more vulnerable; b) the outlook for the Inflation Reduction (IRA) and CHIPS acts, with EV subsidies almost certainly axed by a Trump regime, but given that ‘Red’ (Republican) states have been the bigger beneficiaries of both, much of the rest may be preserved or at the most tweaked; c) Health care eminently under threat from Trump; d) the wars in Ukraine and the Middle East – with Trump expected to force the Ukraine into a ‘peace’ settlement, while also likely attempting to revive the ‘Abraham accords’ (between US, Israel and Saudi Arabia); and e) Iran – though this is highly debatable in impact terms, as Iran and indeed Iraq are now the largest recipients of China ‘Belt and Road’ funding, and per se its oil exports likely to see limited impact, even if it will require increased sanction circumvention measures. Last but not least, there is the thorny issues of US debt levels, which is dual aspect: a) much depends on the result of the Congressional election, with a split in control to result in yet another ‘debt ceiling’ battle, and b) a clean sweep for the Republicans to exercise upward pressure on Treasury ‘term premia’ on expectations of an even larger budget deficit under Trump (though it should be added Harris’ sketchy plans would also imply an unsustainable deficit).