The prospect of a Trump win is too horrible to contemplate, as the rising yields illustrate

Outlook

This is a big data week. We get Australia CPI, the BoJ policy decision, and in the US, PCE and nonfarm payrolls. We also get Q3 GDP for the eurozone and the US, not to mention the usual ADP private sector payrolls.

We wrote Friday that the top factor for the dollar is the election, followed closely by “it’s the economy, stupid.”

The prospect of a Trump win is too horrible to contemplate, as the rising yields illustrate. This move is built entirely on fear. The Fed cannot expect to conduct business as usual if Trump wins, although we won’t know the true outcome of the election by Nov 7, the date of the next meeting. Unless it’s a Harris landslide, might the Fed stay its hand and find some non-political reason to do that? You bet.

The non-political reason could well be the Atlanta Fed’s GDPNow. It had been at 3.4% and on Friday, this was modified to 3.3%. But the actual number doesn’t matter much. The economy is roaring. We also have the possibility of inflation still too sticky (Oct 31) and non-farm payrolls (first Friday so Nov 1), perhaps refusing to show the labor market softness that had been the barely believable justification for the 50 bp cut in September.

Those two days are going to be nightmare. This is because traders in all the markets are so het up and consumed by anxiety that they will over-react to any number, good or bad.

Meanwhile, the one number that counts is the ten-year note yield, which hit 4.25% on Friday and is hanging on to gains today. We have seen a couple of forecasts of 4.40% as the maximum we should expect. The climb has been due to a rip-roaring economy with its hint of inflation not licked, plus the presidential election risk.

We wonder if an additional 15 bp is enough. The consensus has it that if Trump loses the election, he will not concede. After all, winning by hook or by crook is the only way he can stay out of jail. Unless he wins, contesting the election is certain. We could be in no man’s land for far longer than it takes to count the votes, perhaps well into December.

So, while we may expect a Harris win to calm the bond gang, uncertainty over the final outcome can persist. Depending on the numbers, we could see 4.75-5% in the 10-year. On the other hand, an outright non-contestable Harris win in the electoral college, like 300+ (when it takes 270 to win), would be a soothing balm and the 10-year could retreat pretty far, surely well under 4.25%. 

Consider an Op-Ed in the FT on Friday by Edward Luce. He refutes the Blackrock chief Fink’s stance that it doesn’t matter who wins the election. This is patently not so. “The effect of a 20 per cent duty on all imports and 60 per cent levies on China’s would be, um, non-trivial. IMF geeks will know better, but I don’t recall a time when the Fund offered two sets of forecasts for world growth depending on who won the US presidential election, as it did this week.

“On the Fund’s “baseline” scenario, the world economy would grow by 3.2 per cent next year and the US would grow by 2.8 per cent. On their Trump tariff war scenario, global growth would fall by a quarter in 2025 and by almost double that in 2026. The US would lose a full percentage point of its 2025 growth.

“But that’s a conservative forecast. The IMF forecasts presume that America’s trading partners would slap a modest 10 per cent retaliatory tariff on US imports in response to Trump’s declaration of commercial war. But history, and common sense, tells us that once you get into a retributive trade war, the tit-for-tat only gets worse — beggar-thy-neighbour.

“So the IMF’s forecasts are relatively optimistic. Moreover, they do not factor in Trump’s oft-repeated vow to fire Jay Powell, the chair of the US Federal Reserve. All of which makes me wonder what Fink can be…  thinking. If trade wars, deglobalisation, and renewed inflation are not market moving, what is?”

Forecast

The tentative effort to claw back some of the dollar’s gains went nowhere much last week. We got a stall, not a meaningful correction. We expect more of the same this week and really until the US election results are in. The election is Nov 5 but we may not know the true outcome even by the weekend.

Everyone know this unhappy fact and that probably means yields stay high and perhaps go higher, providing support for the dollar, overbought conditions notwithstanding.

Bloomberg calls it a “critical two-week stretch.” We will get “A blockbuster run of big tech earnings, jobs data, the Federal Reserve meeting, Chinese policy and Treasury market announcements, plus the final days of the US presidential election.” We also need to deal with the announcement effect of the  UK budget, and inflation data everywhere, including the US.

There’s a lot here to support the dollar and very little to put a dent in it—except those pesky charts, which show the dollar rally very long in the tooth and deserving of a respite. 

Political Tidbit: As of Sunday afternoon, the Silver Bulleting has Harris with 46.8% and Trump with 47.4, well within the margin of error. Sunday TV focused on Harris having women and Trump having men. What balderdash. The implication is that women are wise and are thinking about the rule of law and rights, while men are stupid and responding to macho BS. This is unfair to men. Meanwhile, the Washington Post has Harris ahead in 4 of the 7 swing states, and the NYT has a poll showing 76% of respondents think democracy is under threat.

Tidbit: The Economist magazine features a pair of stories about the coming downfall of the dollar as the reserve currency. As long-time readers know, we refute these stories some of the time and other times just ignore them. For all the reasons, check out our full chapter on the subject in our book with Vicki Schmelzer, The FX Matrix.

This time The Economist homes in on the stupendous rise in gold and the BRICs conference in Russia, where Putin wants to de-throne the dollar with a digital-based settlement system. Digital is coming—no doubt about it. But the fact remains that any country with a surplus in another BRIC currency from a trade imbalance will not be happy with the assets available, nor the lack of commitment to the property rights of the asset-holder.

The Economist sums it up nicely: “Central banks worried about sanctions are turning to gold, not the yuan. Rather than devising  a whole new payments system, the BRICs  could simply have agreed to use one of their currencies for trade between them. They have not done so. Chinese manufacturers mya be invoicing in yuan, but bilateral trade between Brazil and India is not going to be settled in Beijing.

The dollar will therefore not be dislodged as the world’s reserve currency.”

The Economist then goes on to ruin it. The power of the dollar as reserve currency is diminishing. “Central bank reserves held in gold are out of Uncle Sam’s reach.” The point is that sanctions are less effective. But the implication is that the US government seeks to control others’ reserves. This is not true. The only time the US grabs someone else’s property, like money in its banking system, is “when a country is designated as a state sponsor of terrorism or when there are severe sanctions imposed due to significant international violations, often requiring specific legislation from Congress to authorize such actions.”

It's a big deal to seize someone else’s property. The US hardly ever does it. The US grabbed money and assets from German companies in World War II, Cuban money in

1996, and Iraqi money in 2003. It seized Russian money after the Ukraine invasion. That’s four times in 80 years.

Most of the other instances concern terrorists and drug dealers. Finding exact numbers and amounts is not easy. US government websites deal with the issue span the US Customs and Border, the IRS, the FBI, the Justice Dept, the US Marshals and probably a half dozen more.

But we say the bottom line is that the American principle of the right to property has very few exceptions. The US does not seize another country’s money willy-nilly. It does not have nor seek to have the power to do any such thing. It’s a Big Deal when it is done and very, very rare. The same cannot be said of any of the BRICs. 

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