Election Scenarios Starting To Be Priced In

Oct 13, 2020
The White House

September Retail Sales & CPI Head This Week’s Releases

We are one week closer to the election and it seems the markets are getting comfortable pricing in a Biden win and that has helped give a lift in Treasury yields over the past week. The thinking is if the win is decisive enough to be known election night that prevents the contested election scenario that could drag on for weeks or more with all the contentiousness that will come with such a result. The fact risk assets have been behaving well seems to indicate that odds of that scenario have fallen. But polls are polls and we all remember 2016 so the lingering uncertainty will continue. The question becomes if a Biden win is realized does the back up in yields persist? Most likely yes, and if it’s a blue wave with the Senate trading hands then the move could have some oomph to it as a large fiscal stimulus package becomes a near certainty.   We still think a 10-year yield under 1.00% is likely but if it breaks above there is plenty of resistance to slow a rise to 1.25%. Ultimately, the pandemic and it’s impact on the economy will reemerge as the dominant factor determining yields and with cooler weather around the corner those pandemic-inspired headwinds are likely to get worse. Meanwhile, this week we get September CPI readings this morning with the Core rate expected to remain at 1.7%YoY for a second month and Friday we get September retail sales with some modest uptick over August levels.


Treasuries
Treasury Curve Today Week Change
3 Month 0.09% +0.01%
6 Month 0.11% +0.01%
1 Year 0.12% Unch
2 Year 0.15% +0.02%
3 Year 0.19% +0.03%
5 Year 0.33% +0.04%
10 Year 0.76% +0.05%
30 Year 1.55% +0.04%
Short-Term Rates
Fed Funds 0.25%
Prime Rate 3.25%
3 Mo LIBOR 0.22%
6 Mo LIBOR 0.25%
12 Mo LIBOR 0.35%
Swap Rates
3 Year

0.270%

5 Year 0.401%
10 Year 0.791%
Economic Calendar
Date Statistic For Briefing Forecast Market Expects Prior
Oct 13 NFIB Small Business Optimism Sep 101.0 104.0 Actual 100.2
Oct 13 CPI MoM Sep 0.2% 0.2% 0.4%
Oct 13 CPI Ex-Food & Energy MoM Sep 0.2% 0.2% 0.4%
Oct 13 CPI Ex-Food & Energy YoY Sep 1.7% 1.7% 1.7%
Oct 15 Empire Manufacturing Oct 14.0 14.0 17.0
Oct 15 Philly Fed Business Outlook Oct 14.3 14.3 15.0
Oct 16 Advance Retail Sales MoM Sep 0.8% 0.8% 0.6%
Oct 16 Retail Sales Control Group MoM Sep 0.3% 0.3% -0.1%
Oct 16 U. of Mich. Consumer Sentiment Oct P 80.5 80.5 80.4

calendar icon Top 5 Events for the Week

Oct. 13 — 16, 2020

1.  Election Scenarios — All Week
2.  September Retail Sales — Friday
3.  September CPI — Tuesday    
4.  Preliminary October U. of Mich. Sentiment — Friday
5.  NFIB Small Business Optimism — Tuesday

 

1.  Election Scenarios and Yields — All Week

We are one week closer to the election and it seems the markets are getting comfortable pricing in a Biden win and that has helped give a lift in Treasury yields over the past week. The thinking is if the win is decisive enough to be known election night that prevents the contested election scenario that could drag on for weeks or more with all the contentiousness that will come from such a result. The fact risk assets have been behaving well seems to indicate that odds of that scenario have taken a hit. But polls are polls and we all remember 2016 so the lingering uncertainty will continue. The question becomes if a Biden win is realized does the back up in yields persist? Most likely yes, and if it’s a blue wave with the Senate trading hands then the move could have some oomph to it as a large fiscal stimulus package becomes a near certainty.   We still think a 10-year yield under 1.00% is likely but if it breaks above there is plenty of resistance to getting above 1.25% (see chart below).  Ultimately the reality of the pandemic and the economic headwinds of it will limit any election-inspired volatility and keep yield moves in check from becoming more dramatic moves.

 

US Treasury 10 Year Yield

 

2.  September Advance Retail Sales — Friday

Perhaps second to the monthly jobs reports the Advance Retail Sales Report is a first-tier indicator of the health of the consumer and hence the economy. For September, sales are expected to be up 0.8% versus 0.6% in August. Sales ex-auto and gas are expected to stay positive but slow with an  up 0.4% reading versus 0.7% in August. The retail sales Control Group—a direct feed into GDP—is expected to be up 0.3% versus –0.1% in August.  Thus, if  expectations are met some strengthening in sales versus August but certainly off the strong bounce in May and June.

 

3.  September CPI Report — Tuesday

Inflation has been mentioned as a latent threat given all the stimulus initially provided to the economy and monetary accommodation provided by the Fed, but with a second stimulus package still tied up in the halls of Congress, that influence should start to dissipate. Overall CPI is expected to increase  0.2% versus a 0.4% pop in August. The core rate (ex-food and energy) is expected to also increase 0.2% versus a 0.4% pop in August. YoY CPI is expected to be 1.4% after last month’s 1.3% result. Core CPI YoY is expected to remain at 1.7% for a second straight month. With docile YoY numbers, inflation may be something to expect at some point but that’s probably next year’s story, not 2020. And with the Fed’s New Monetary Policy Framework, if Core YOY does climb over 2% the Fed is likely to let it be.

 

4.  Preliminary October Univ. of Michigan Sentiment — Friday

With the consumer playing such a pivotal part in the economy, gauging their sentiment is crucial to determining how likely they are to continue shopping as virus cases continue to spike. For October, the Bloomberg consensus is for sentiment to essentially be unchanged from September with a 80.5 reading versus 80.4 in September while consumer expectations edge higher to 77.0 versus 75.6 in September. The sentiment index peaked at 101 back in February and bottomed at 68.0 in April. So while there has been some improvement off the lows, sentiment appears to be stalling around the low 80 area which is well off the pre-pandemic levels, a fairly logical read on the situation.

  

5.  September NFIB Small Business Optimism — Tuesday

In the field of confidence readings the Conference Board’s Consumer Confidence Report and the University of Michigan Consumer Sentiment Survey are the two biggies, but in the field of small business confidence the NFIB report carries the day. The report was released this morning and posted a 104.0 reading for September, beating the 101.0 expectation and a nice improvement from the 100.2 reading in August. It got as high as 108.8 back in August 2018 and dipped to 90.9 in April. The average over the past two years is 100.7 so sentiment has moved above that two-year average mark.

 

 


bar graph icon  Yield Universe

 Yield/Duration Relationship 

 

CenterState Disclosure

 


 

Tom Fitzgerald Signature 

Thomas R. Fitzgerald

Director, Strategy & Research

Tfitzgerald@centerstatebank.com

 

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