US Macro: Stimulus delay won’t derail the recovery, but it raises unnecessary risks – President Trump’s surprise move overnight to end talks on a second round of stimulus may prove to be the nail in the coffin to his foundering bid for a second term (see below). In the meantime, the biggest risk is to the US recovery, with a clear need for support in the sectors hardest hit by the pandemic (travel and hospitality), as well as state & local governments that have been hit by a double whammy of lower tax revenues and high spending needs. It is in these sectors where the numbers of furloughed workers remains elevated (numbering around 5-6m in total), and where permanent job losses are most likely over the coming months. Some of these job losses would be inevitable, given some of the structural changes the pandemic appears to have triggered, such as increased home working. However, with the pandemic continuing to have a significant impact on the economy right now, many of these job losses are preventable with the necessary support measures in place. As things stand, the basic level of support for furloughed workers – unemployment benefits – will continue through to at least the end of the year. The second stimulus package would have boosted that basic level of support with a further round of $1200 stimulus checks and top-ups to unemployment benefits, as well as targeted assistance to airlines and local governments. These are certainly ‘nice to haves’ and would act as a brake on permanent job losses. However, while the failure to pass further stimulus now – as opposed to after the election on 3 November – raises the risk of a more sluggish recovery, we do not think it will derail the recovery entirely.
Republicans lose their polling edge on the economy, raising the chance of a Democrat sweep – In what looks to have been a grave miscalculation, President Trump’s abrupt move to end talks on stimulus appears to be backfiring politically. His intention was most likely to force a bigger compromise from Democrats in the negotiations, but the result is that he is now being blamed for the failure to reach a deal. Indeed, Trump is now trailing Biden in the one policy area where he had maintained an edge – the economy – with the latest opinion poll showing voters think Biden would better handle the economy at 50% vs 48% (the equivalent figure in May was 42% vs 54%). Meanwhile, Biden continues to extend his broader polling lead, with the RealClearPolitics average now giving him a 9.0 point lead over Trump – and some outlier polls showing leads as high as 14-16 points. Biden has also increased his lead in the crucial battleground states to an average 4.4 points, up from 3.4 points just a week ago. All of this makes Democrats look increasingly likely to gain control of the Senate, and the betting market probability of this has risen to 67% as of yesterday, up from 55% in mid-September. Democrats winning a majority in the Senate raises the prospect of an all-blue executive, making Biden’s aggressive spending proposals much more likely to be implemented (see Likely Democrat win in November, but could be a bumpy ride for more).