Double Trouble

By Benjamin Picton, Senior strategist at Rabobank

Just when you thought that the US election couldn’t get any more nuts, we’re onto Trump assassination attempt #2. The FBI detained suspect Ryan Routh, a 58-year-old Hawaiian, who allegedly pointed an AK-47 at the former President while he was playing a round of golf in Florida. The Secret Service is reported to have fired shots at the suspect before he fled the scene in an SUV. Trump is reportedly unharmed.

After the first attempt on Trump’s life back in July, the former President saw a significant improvement in his polling numbers. The media half-life on that assassination attempt was remarkably short given the gravity of its implications, but Joe Biden quit the race just over a week later as poll pressure and Biden’s poor performance in the June debate combined to convince senior Democrats that switching horses mid-stream might be the least-worst alternative.

This time the shoe might be on the other foot. Most commentators suggest that Trump lost the recent debate against Kamala Harris, but Harris certainly didn’t deliver a knockout blow. Harris appeared sharper and mostly avoided her trademark word salads, but the cut-through moment of the debate might have been Trump’s “they’re eating the dogs; they’re eating the cats.” If that’s the only thing that low-engagement voters who care about animal welfare remember, it might be advantage Trump.

Market reaction to assassination attempt #2 is minimal. The DXY index is slightly lower in early trade, high-beta currencies like the AUD and NZD are marginally higher, crude oil is up smalls and Asian stock indices have mostly opened a little lower (with the exception of the ASX200). The message seems to be that financial markets have quickly become desensitized to near-misses for Presidential candidates, despite genuinely paradigm-shifting economic realignment being on the ballot in this election.

On that score, Trump added to his policy platform over the weekend by pledging to eliminate income taxes on overtime pay should he be successful in regaining the Presidency. This comes on top of a prior commitment to remove income tax on tips (a pledge that the Harris campaign has also adopted), a pledge to remove taxes on social security benefits, the planned extension of the 2017 tax cuts and a proposed cut to the corporate tax rate from 21% to 15%. Trump’s platform is aimed squarely at the American middle and working classes, with universal tariffs on imports the key revenue measure proposed to make up for (some) of the shortfall in the tax take, while also shielding American workers from competing with cheap imports and immigrant labor.

It has long been Rabobank’s house view that Trump’s economic platform is likely to induce a domestic inflationary boom, with attendant second-round effects internationally as jurisdictions like the EU, China and others seek to protect their own industry via protective tariffs and non-tariff barriers. The Harris platform is less inflationary (involving higher taxes on employment income, capital income and corporate profits), but don’t make the mistake of thinking that this means she represents a shot at fiscal conservatism. There is no deficit hawk in this race.

That makes life hard for Jerome Powell and his colleagues at the US Federal Reserve, who will almost certainly begin cutting the Fed Funds rate this week. The perception that a cut is a fait accompli means that the size of the cut is the only matter of debate at this week’s meeting. This time last week the futures market had ~33bps cut priced into the Fed Funds rate for September. That fell to ~29bps following the publication of the August CPI report on Wednesday as the core reading printed 1-tick higher than expected on a month-on-month basis.

Market pricing has since shot up to a cut of ~66bps following the publication of an article in the Wall Street Journal by Fed whisperer Nick Timiraos which suggested that inflation data might be sufficiently benign – and the starting point for Fed Funds sufficiently restrictive – for the FOMC to deliver a double-sized cut first up. This view is motivated by the Fed’s recent shift in focus from inflation to unemployment, and comments from Powell that further softening in the labor market would not be welcomed. Gold prices seem to have sensed the theme and are rallying to fresh all-time highs this morning.

Later this week we will also see labor market data for Australia. The RBA has been an something of an outlier for central banks recently as it admonishes markets not to expect a rate cut this side of Christmas. The local commentariat remains in a state of disbelief (despite briskly rising house prices, stock prices near all-time highs, tightening credit spreads, a fiscal stance shifting rapidly from restrictive to accommodative, accelerating private credit growth, low productivity growth, a low savings rate and stubborn core inflation) as rate cuts are an article of faith Down Under. The futures market is also ascribing little credibility to the RBA’s protestations, pricing in a 90% chance of a rate cut by December. Former RBA Governor Lowe’s wildly wrong “no rate rise until 2024 at the earliest” forward guidance lives long in the memory of traders who would also be looking at falling commodity prices and grim China data over the weekend as they place bets on earlier easing.

The RBA’s Chief Economist Sarah Hunter gave a speech last week unpacking the RBA’s view that the Aussie labor market remains tight (despite recent softening) and that the unemployment rate is still below estimates of the ‘full-employment’ level. That tightness in the labour market also feeds into the RBA’s view that Australia still has a positive output gap (aggregate demand exceeding aggregate supply), whereas peer economies who hiked rates further are now experiencing excess capacity and are beginning to cut.

Hunter’s RBA colleague Brad Jones will be speaking on Wednesday. He is responsible for financial stability and Governor Michele Bullock has recently hinted that he might unpack some good news about the resilience of Aussie households and business in the face of the recent hiking cycle. Could the Hunter and Jones double act be a one-two punch to knock out hopes of an Aussie rate cut before Christmas?