The Week Ahead – Midterm madness?

Democrats need a net gain of three seats in the House and four in the Senate next week to reclaim control of either chamber. That's it. And the latest race ratings from the Cook Political report put both within reach. Hello and welcome to the week ahead on numerous podcasts. I'm your host, Andrew Tysus, from our global markets research team and today is Friday, October 30th. It's been a busy week with tech-related headlines, geopolitics and key central bank meetings all in the mix. Next week could bring plenty of action to the US midterms of finally upon us and attracting global market attention. We also have central bank meetings in the UK, Australia and Malaysia to look out for and we expect great parks from all three. And it's payrolls week two with USISM data likely to gather some attention as well. Now this week I'm absolutely delighted that we'll be able to bring you a special guest, Samira Fizzili, numerous head of public policy and government affairs across the Americas. Samira is going to share some final thoughts on the midterms, what to look out for there and what the fallout might be. We'll also catch up with Rishia Sharma in New York. He'll take us through that if I own seek policy announcement and communication this week and share his thoughts on that payrolls report too. Over in London, George Buckley will be along. I want to ask him about the ECB policy meeting this week and this week's UK budget as well and the Bank of England meeting next week. And then we'll swing down to Japan to catch up with Hichiro Nazaki from numerous research to Miantogio to discuss today's BOJ policy announcement hot off the presses. And I'll wrap things up with some quick thoughts on Asia, CBR releases coming quickly fast across the region there along with our expectations for those central bank meetings in Australia and Malaysia. It really is a jam pack special edition this week. So let's dive in. This week we're going to start with the US midterms and I'm super happy that Samira Fizzili, numerous head of public policy and government affairs across the Americas, has been able to find some time at a very busy time to be here with us. So Samira, welcome to the podcast. Thank you Andrew. Excellent. Now I have probably a dozen questions swimming around in my head. I think the world and global markets are watching these midterms with great interest but we're going to have to keep this one a bit concise and punchy. But I don't have to ask first up Samira as a local and a Washington insider that what's the vibe like? Is there a buzz in the city or is all the action kind of out in the states where the big rallies have been? I would say there's a lot of buzz in the city actually. It's interesting I've spoken to colleagues in similar roles and I think the consensus seems to be that this is a kind of an especially busy, busy October. You know typically before an election Congress leaves D.C. things quiet down here. But I think everyone's just very, there's a lot of buzz and anticipation of a change. People are trying to get ready for what the new you know what a new dynamic might bring. So I would say there's a lot of buzz. Obviously a lot of buzz in the states as well but just being in D.C. it's been a very you know it's been a very busy and interesting October I'll say that. Now I think the starting point according to the polls is that the Democrats are quite likely to retake the house with a comfortable working majority. But the Senate race is tighter maybe the Democrats are just ahead. I wanted to ask is that still a sensible starting point and you know as the polls close and the numbers start to come in which states are you going to be watching to see which way this thing might break. Yeah I would say that the sensible starting point. Our view and this is the view of America's public policy and government affairs is that Democrats have a 90% chance of flipping the house and a 60% chance of flipping the Senate. Currently Republicans control both chambers. You know I think Republicans have somewhat of a structural advantage in the Senate. Democrats have to not only hold on to three seats to in states that Trump won but also flip for some in states that Trump won by double digits. So that's a heavy lift but things do seem to be trending in the Democrats direction which is why we're at 60%. And then looking at election night and where I would you know states I'm looking at I'll point out for the polls close early there on their key states. I'll say Georgia, New Hampshire, Ohio and Michigan. Georgia the Democratic Senate candidate John Assoff is expected to win. He's pulling far ahead but if somehow that's narrower than expected or he loses I think that'll throw kind of the polling on its head and you know could really could really shake up the rest of the night. And then New Hampshire that's currently a Democraticly helped seat. It's a pretty tight race. It's a toss-up race. If Republicans flip the New Hampshire seat they have an 85% chance of winning the Senate and that those polls close at seven so we might have a strong sense at that point. And then Ohio and Michigan. In Ohio the Democratic Senate candidate is running ahead just barely of the Republican candidate. If he wins there great pick up for Democrats great chance that they keep the Senate. If the Democrat loses again probably a better night for Republicans stronger chance they take the Senate. And then Michigan is a Democratly helped seat tight race there as well. You know many expect that to go late into the night but if for some reason we see a strong winner early on Republican or Democrat I think that's a strong tell for how the rest of the night goes. And I think if the Democrat wins early in Michigan that's probably a good sign for Democrats. If the Republican wins in Michigan that raises the Republicans probability of retaining the Senate to 78%. So those are pretty key races and we should know you know by at least the 830 period how those are going. Okay good one thank you. Now look if we do get this blue wave it would be easy to imagine that President Trump is not going to be very happy. So I wanted to ask what would his game plan be? Do you think he'll dispute the results and try and muddy the waters or could he come out swinging even harder and relying even more on the executive authority powers that he still has? So I will say with respect to executive authorities the president cannot directly overturn the results of the election or refuse to see the member of Congress. Each chamber judges its own members elections and states conduct recounts. He can however pressure state and federal officials to do recounts to refuse to see the member. So I think we'll see some of that potentially. Already the Department of Justice has filed a lawsuit seeking to bar Alaska from certifying its midterm election results because there are two Dan Sullivan's on the ballot. One is the incumbent Republican Senator the other is another Alaskan. So you know I think we're already seeing groundwork being laid for this. Both Democrats and Republicans are already gearing up. They put a lot of resources into their legal teams in anticipation of these contests. Typically in terms of timing most of this is resolved by January 3rd when the new Congress is seated typically even before then by the Thanksgiving holiday in the U.S. There is precedent for this going longer in a few rare scenarios in 2008 the winner of the Minnesota Senate seat was not seated until eight months after election day. So this could you know the Senate control is really what I'm watching. I think House control will be determined pretty early on based on the polling. But if the Senate comes down to one or two seats I definitely think we'll see sort of a protracted dispute over this and we may not know who controls the Senate until later in the year but I don't really see this going beyond January I think there's a low risk of that. Okay well a week can be a long time for markets so yeah we might have to be watching this one for a while. Hey let's spend a minute or two on the new Congress. Now my understanding is there's been relatively less legislation passed over the last two years compared to you know prior equivalent periods. Push back if I've got that wrong but how can things look over the next two years? Could we get even less legislation or do we get some horse trading? Do you know the Democrats for example can see some ground if they can get health care cuts rolled back for example. Yeah you know numbers wise what you said earlier is accurate. Pew actually did a pre-election comparison and this is the second lowest total in 40 years. It's actually more than the last Congress 121 public laws versus 106 but in recent years actually I think you know this might be a little bit misleading because in recent years Congress passes large packages so a lot of policy priorities are packed into one package so it looks like fewer bills are being passed but let's say in last year's one big beautiful bill act there were several different policy priorities included in that one package. Similar to President Biden's Inflation Reduction Act so we see more of that in Congress rather than kind of individual standalone bills but you know looking forward I think as we've seen the President has taken a pretty expansive view of executive authority and many of the concrete policy changes will be likely occurring at the regulatory level through agencies and I don't think those agencies agenda will change just because it's a change in Congress. So I think from you know all the major regulatory agencies I don't think we'll see a big shift in priorities because there's Democratic Congress. However these agencies may be slowed down by congressional investigations into their activity so you'll see some legislating from Democrats. There will be some force trading around government spending and the debt limiter and we probably will discuss a little bit later about in exchange for voting for raising the debt limit. Will the White House agree to to repealing Medicaid spending cuts. But I think the thing that people should watch are investigations. Most people in DC were now preparing for many congressional investigations. Democrats and Congress will likely investigate not only the White House and Trump officials, they'll also private sector actors that could, that have worked with the White House or that have benefited from White House policies. And so I think that's something that we'll see a lot of. It's reported that the AI industry could be a target of some of these investigations. So I think that's something to watch moving forward, maybe as opposed to legislation. - Okay, good one. Hey, I just on AI, you mentioned there, we had seen that line from Trump, he who wins on AI wins that really, I found that striking. Clearly he's not a fan of guardrails on AI development. But one of the prospects for regulation elsewhere at the federal or the state level after the midterms. At the federal level, I would think I can legislate the chance of legislation are pretty low. The legislation that's already been proposed in Congress that has support from Republicans and Democrats has been more around directing state regulators to do certain things. It hasn't really been targeting the AI companies, either on the data center front or on the model front in any kind of meaningful way. And I think given that the White House has staked out the position, it's staked out. I think federal legislation is unlikely in the next two years. I do think there is very likely to be action at the state level. Many of the gubernatorial candidates in key states have proposed stricter AI regulations. I think data center construction will be under a lot of scrutiny. Data centers have just become a huge flashpoint in this election. And I think legislators at the state level will respond to that. And already on this year's ballot, there's several different state level initiatives, local initiatives to curb data center construction to share the costs. So I think there'll be a lot at the state level. And then I think as we get into the 2020 election season, we're going to see a lot of policy proposals. And so I would look to more 2029 and beyond for federal regulation. But I think we'll see a lot at the state level that may lead a groundwork for federal regulation in the future. OK, got it. And Samira, final question. You mentioned the debt limit there a minute or two ago. This one's also been on my mind. And as a market participant, we've been watching the sovereign debt concerns in France over recent weeks. And these issues pop up from time to time in the UK and Japan as well. Looks like Congress is going to have to deal with that one at some point next year. But I wanted to ask, you know, I'm a long way away from the action there. Do you think the average US politician kind of gets that the US does have a lot of debt? Is there any sort of prospect for fiscal reform or is that one just in the too hard basket? I would say that the too hard until there's an emergency basket. You know, I think it's very-- it's something that a lot of legislators talk about. It's something that they're concerned about. But I think the problem is that once a party gets into power, there's a short window to legislate or to get through policy priorities. And so spending almost becomes the debt limit almost becomes an afterthought. And so I do think if the concern people have, but I think until we reach the crisis point, I don't think it'll be tackled in a meaningful way. OK, cut it. Yes, sometimes you need a crisis to bring about great change, of course. Hey, Samar, this is all fascinating. We're clearly going to see some history being written next week. I really appreciate you coming on the podcast and sharing your thoughts with us today. Thank you, Indra. [MUSIC PLAYING] Now, let's check in with Rishia Sharma from Numeras, New York-based research team. Hey, Rishia, how are you? Hey, Andrew, I'm good. It's great to be back on the podcast today. Excellent, thank you. Hey, busy week for you this week, I know we've had policy meetings from the FOMC and the Bank of Canada too. Can you share some thoughts with the highlights there for you? Yeah, so rather a busy and an interesting week for central banks with the Fed holdings rate steady, while the BoC delivered its first hike in more than three years. So starting with the Fed, the decision to hold was widely expected and sort of telegraphed, but there were a couple of interesting surprises. So first, there were two hawkish descents, including an unexpected one from Governor Cook, probably because she was concerned about AI-related price pressures. So that was interesting. But perhaps the bigger takeaway was that Chair Worsh's press conference had a couple of dovish elements. He seemed quite comfortable with the strength of the economy, and he did say that demand isn't adding to inflation. However, and he didn't think that it was an reason to tighten policy aggressively. In fact, he retreated some of his previous arguments that stronger productivity growth could help contain inflation. On inflation as well, he seemed to downplay the recent surprises, and he did suggest that the September hike or the monetary medicine that they had administered was already having some effects. Overall, our takeaway was that Worsh seems comfortable with further tightening, but he is not particularly enthusiastic about it. So we continue to expect one final 25 basis point hike in December, followed by a whole day 27. So turning to the BoC, they hiked. And importantly, we think that this was a precautionary hike rather than the beginning of a sustained hiking cycle. The BoC did mention that they considered a hot-looking pandemic for hiking. And interestingly, the bank itself acknowledged that there are a lot of uncertainties, and they said that they would proceed carefully with further tightening. So I think that supports are called that the BoC wouldn't go for consecutive hikes. They'd probably pause in December, and deliver a final 25 basis point hike in January. - Okay, got it. That's very clear. Thank you. Hi, I'm turning to the calendar. I reshared the data, the wake ahead. There's a number of things on the calendar, but I guess these pyroles wake, and that's usually the highlight. So what's your focus for that one? - Yeah, so we think labor markets are pretty resilient. We expect headline payrolls, they rose by around ATK in October, following a relatively weak September report. We think that the unemployment rate that down to 4.1% from 4.2%. So overall, labor market has remained pretty steady. Hiring has slowed after years, but we have seen signs of labor demands stabilizing and even picking up a bit. Again, these have seen that layoffs have remained pretty content, continuing claims have edged lower, and consumers are actually turning pretty optimistic about finding jobs. So overall we think that labor market remains healthy, and that would keep the Fed focused on inflation lists. - Okay, understood. And we're actually finally midterms. I've just been chatting with Samira, and we've been covering off on some of the states to watch and how things might look for Congress, et cetera. But yeah, I wanted to ask you, if you had any thoughts, maybe more with respect to macro policy, fiscal policy, potential market impacts, is there anything you're watching or thinking about there? - Yeah, so apart from all the polling in everything, I think the interesting thing about the elections is that we could see a fairly significant shift in political control, without a similarly large shift in economic policy. So we think that Democrats are gonna take both the chambers, but we don't expect the meaningful change in near-term growth or inflation outlook simply because of the elections. We'll be watching fiscal policy, specifically, that's an important thing, because President Trump would like to get his priorities like government funding, debt ceiling, to probably want to resolve them in the lame duck session. So that's something that we are watching. - Okay, good one. Hi, Rishi, thank you so much. Let's say a bit there. Thank you. (upbeat music) - Now let's move to London, get the lettuce from George Buckley, the numerous chief economist for Europe and the UK. Hey, George, welcome back to the podcast. - Hi, thanks for having me on, Andrew. - Okay, good one. It looks been a pretty busy week for you. We had the ECB policy meeting that was very recent. Can you give us your thoughts what were the highlights from that one? - Yeah, well, the statement itself was actually a bit more dovish, but then we had the usual hawkish take in the meeting itself in terms of the press conference. And I think what Lagarde said, of course, her data number now, she's gonna be leaving the ECB in February. But what she said was that it's very likely, or this is what she suggested, it was very likely that the ECB is gonna be raising rates again in December, and that's now what markets are pricing. It's what we're expecting. We think that the ECB will raise a couple of times more once in December, once in March next year to take rates to 3%, that'll be above what we think is neutral. It needs to be as well because inflation is on the way up. It's gonna be stronger than we originally thought, and people are very concerned about second round effects, which we're all watching very closely. But ECB to tighten again, probably a couple of times more we think. - Okay, good one. Hey, George, I'm glad you mentioned Lagarde's departure because I wanted to give you a little hat tip. I saw you're right up and you wrote about changing of Lagarde. I thought that was pretty good. But look, more seriously, in the UK, We also had the autumn budget this week. It didn't seem to upset the Apple card and I guess that's a good outcome under the circumstances. What did you see in the budget? It is well, thanks Andrea. We do like our titles. We called the UK budget title "breathing easier" because they did try to provide breathing space. And I think that's exactly what the market was breathing easier after this budget. Ten-year yields were down on this. So they took the budget reasonably well. There wasn't really a big change. A lot of measures that they introduced. And don't forget Andy Burnham, the prime minister, is from the left wing of the party. He's got some very bold plans. So the fact that there was a big risk that they could do something bold in this budget and spend a lot of money, that they took the markets face value and what they've said is that we don't want you to miss your fiscal rules. They didn't miss the fiscal rules. They didn't do a lot in terms of measures just as a summary. It was about 0.2% of GDP easing. In the near term, the measures they announced are 0.2% clawback further down the line. So if anything, it sort of supports the idea that the Bank of England could raise rate as the love of the data does next week. But again, nothing too much to shake the markets. Okay, good one. And look George, finally, this is the week ahead podcast. Of course, we better turn our attention to the BLE. They'll be out with a policy announcement next week. Are they going to be in a high grades? I think they will. I think the markets are 24 basis points priced in that does not really much room for error. But I do think they will raise rates. And I think the way that they will see this as an insurance move, which is countenanced by the stronger data that we've had, an insurance move to guard against the risk of second round effects. We won't know if second round effects are coming until they actually arrive. I think that's worth bearing in mind. So if they're going to move against second round effects, they're never going to know that they're coming. It's just against the risk of them possibly turning up and causing inflation to be more persistent. So I think the rate hike is reasonable. We've recently changed our view to a hike in November and one of February. We think they'll stop there, which would be 425 on rates, which is again above, like the ECB, above what we think is neutral, which is probably around about the 353, 325 mark. So maybe 75 to 100 basis points above neutral. But that's where they need to be to offset this risk of second round inflation. Okay, good one. Ad George, that's all very clear. So yeah, I'll just say thank you. Let's wrap it up there. Super. Thanks very much, Andrew. Turning now to Japan. I'm very happy to be joined by Wichiro Nazaki from numerous global research team in Tokyo. Nazaki is on great to chat. Thanks for stepping up again. Hi, Andrew. Excellent. I look, I was hoping today we could do a bit of a deep dive on the Bank of Japan. They were out today. So this is pretty much hot off the presses. Can you please start by giving us a recap of the BIOJ policy meeting today? Yeah. The BIOJ decided to keep its policy date and changed at 1.25% of the nine board members, only Takata, the most hawkish member, called for a rate hike. This was in line with the expectations. The surprise, however, was the decision on EDFs. The BIOJ had been selling the ETF since January this year. And in this time, the BIOJ decided to increase its pace. Even at this first step pace, it is expected to take about 43 years to complete this sale. And the amount sold would account for only around 0.1% of market trading volume. So far, the stock market's reaction to this announcement has been limited. In its quarter-hour report, as had been reported ahead of time, the BIOJ judged that and the lying inflation has leached 2%. This is the first time the bank has made this assessment since it sets its 2% price stability target in January 2013. The bank cited a range of indicators including inflation expectations that have been allowed 2% as evidence for its assessment. Okay, good one. Yeah, and I thought that was a significant statement. You mentioned there that given an all-way that did in fact state that underlying inflation has now reached 2%. I guess that shapes the outlook for the BIOJ going ahead now that they've achieved this target. So turning from today's decision to the outlook over the period ahead, what are you thinking? Basically, we maintain our focus for the further late hike by the BIOJ in December this year and March next year. The outlook report reiterated that leaks through inflation are scooted to the upside and that financial conditions in Japan remain accommodative. At WEDA's press conference, he did not clearly signal at December but he did reaffirm that they are intention to continue raising rates. With CPI inflation expected to accelerate further toward the end, we think it is reasonable to expect a December hike. The OIS market is currently pricing in 80% probability of a hike in December. If the BIOJ raised rates at roughly three months interval through next spring, as we expect, the policy rate would reach 1.75%. That would put it exactly at the midpoint of the range of the BIOJ estimates for the neutral rates. From next spring over, the BIOJs approach to policy may shift some more. But then, policy rate will have entered a range where it is less clear whether financial conditions are accommodative. Probably, inflation may be showing some signs of having peaked. Since the middle of this year, rate hikes have followed a steady calendar-based pace with about three month intervals. But from next spring, however, policy may become more data dependent. If we expect that the BIOJ will stop the rate hike in March next year, but if inflation peaks later than we expect, the BIOJ could raise rates once more around the middle of next year. That is our risk scenario. Okay, understood. Very good. Hey, Nazaki, some of the calendar for Japan for the weekend is a bit light this time around. So we might leave it there for now. And just say, yeah, thanks very much for coming back on the podcast. Thank you. Finally, let's wrap things up with a quick look across the broader Asia region. This week, I'd like to show in the spotlight on inflation with October CPI data being released in the number of countries across the region. In brief, we expect annual CPI inflation to rise in the Philippines and Thailand and higher fuel and food prices are common factors there. But we think inflation pressures could ease a little in Indonesia, Korea and Taiwan. So it looks like a bit of a mixed bag. And then we have two central bank meetings to look out for. First up Australia, following the release of stronger than expected Q3 CPI inflation data this week and further hawkish RBA communication, including from the governor, we agree with market pricing, the RBA will likely deliver a 25 basis point rate hike on three November. That'll take the cash rate of 4.85%. We think it'll have little tolerance for the material upside miss on Q3 CPI relative towards earlier forecasts, particularly given an extending period of above targeting inflation. We think it'll repeat prior resolute communication expressing sympathy for those hurt by higher rates. But again, it's stressing that high inflation holds everyone. We think it'll revise up its new term CPI forecasts quite a lot. And we expect modest new term upward GDP growth revisions, but modest longer term downward GDP growth revisions as well. And then finally Malaysia, we expect the central bank, their bank Nagara to raise its policy rate by 25 basis points to 3%. That follows a hawkish pivot at the previous meeting and the monetary policy committing signalling that the still accommodative policy stance is no longer appropriate, given the growth remains above potential. In our view, that hike would represent a normalization to a more neutral stance in order to preempt a build-up in financial imbalance risks. Inflation is also subject to upside risks with more signs of broadening price pressures and that also would support a decision to hike. Our team assign a 65% probability to that base case for a 25 basis point rate hike and 35% risk of a no change. The latter, if the bank decides to say patient rather than preemptive due to limited signs of second round inflation effects at this stage. Okay, so there you have it, our views on key developments, major market themes and what to look out for next week. This podcast has been written by Andrew Tyshurst and the Global Markets Research Team and edited and produced as always by John Dalton. 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