As we write this morning the presidential race is still undecided. Biden is up 238 electoral votes to Trump’s 213 (270 to win) but the make or break states of Wisconsin, Michigan, and Pennsylvania remain out with Arizona flipping to Biden and Georgia still counting and close. Tabulating absentees could take a couple days and given the closeness in those states it could be tomorrow Friday before a victor is called. Meanwhile, Biden has just moved into a lead in Wisconsin and that could be a harbinger of the other two Iron Belt states, Michigan and Pennsylvania that are so important to both candidates. The race nationally was once again much closer than the polls had it and it also wasn’t as close as some suspected in the Senate. Dems were hoping to flip the Senate but instead of gaining four seats to do that it looks like we may end up with the same Republican advantage but with some new faces, nonetheless. The markets are treating this as both a risk-on in equities and a rally in Treasuries. The equity rally comes from the thought that while some uncertainty of a winner exists, it looks like it will be decided imminently. The Treasury rally stems from the thought that a Republican Senate will rebuff some of the more aggressive legislative and policy initiatives of a Biden White House (read no big stimulus bill).
The FOMC meets today and tomorrow in what should be a placeholder meeting until December 16 when the dust from the election has settled and all the questions we have today are answered in some form or fashion. The other thing going against this meeting is it doesn’t have updates to the Fed’s rate and economic outlook. That will come in December so that points again to that meeting being pivotal as we head into 2021.
So, we are left with what can the Fed do on monetary policy if a Republican Senate blunts much of a Biden administration wish-list on stimulus and infrastructure? One thing is to add to the Quantitative Easing program and probably move purchases to longer duration assets in order to keep longer-term yields from climbing to an uncomfortable level. With the short-end of the curve locked down by the Fed through 2023 given their forecasts, the long-end is the area prone to yield increases if the market senses either a ramp higher in economic activity in the months ahead. The graph below tracks the enormous increase in the Fed’s balance sheet since the pandemic hit and the program can continue. There is no asset limit or time limit to their QE purchases.
Job Gains Solid But Trending Lower Leading to a Lengthy Recovery
Friday brings the October Employment Report but this morning we did get the ADP Employment Change Report and it printed a gain of 365,000 private sector jobs missing the 643,000 expectation and well off the 753,000 gain in September. And that’s the same trend we’re seeing in the BLS jobs report, solid job growth but with a decided trend lower in the monthly gains. The Friday report is expected to show 600,000 new jobs versus 661,000 jobs in September.
Recall, the economy lost 22 million jobs in March and April and to date, the recovery will have recouped about 12 million jobs leaving a net deficit of 10 million jobs. If gains continue to drift slightly lower on a monthly basis, we’re looking at those lost jobs being recouped in more than two years. That gives you a clear indication of why the Fed is likely to remain in super-accommodative mode for the next several years.
Agency Indications — FNMA / FHLMC Callable Rates
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