Weekly Investment View: Trading Around the US Election

This Week

• Global Macro – Bilal discusses market messaging into the US election.
• US Macro – Dominique highlights key pieces we have published on the US election.
• US Rates – Antonio thinks the US elections are neck and neck, and Harris’ chances have been underestimated by markets (why he closed his US rates short last week). US rates will likely rally less with a Harris win than they will sell off on a ‘Red sweep’, so there could be a better entry point to reenter shorts post-elections.
• EM Macro – Caroline expects the CNB to cut 25bp cautiously this week with downgrades to GDP and wage growth.
• EZ and UK Macro – Henry expects the BoE to cut 25bp, but the commentary around that will be a key determinant to UK rates ahead.
• DM FX – Ben expects the euro to outperform if Trump fails to secure an election victory.
• Canada – Viresh sets out an important week for BoC watchers, with an overview of his thoughts on the key labour market data.

Table 1: Current Trades
*Total returns using daily close price. Positions are sized such that impact of any one trade on portfolio is no larger than 50 bps.
Asset Class	Date entered	Trade	Rationale	Entry	Stop Loss	Target	Current Price	P&L*
FX	25-Oct-24	Short AUD/NZD (25% position)	Click here	1.1050	1.1300	1.0600	1.1035	0.3%
	17-Oct-24	Long USD/CNH 3m 7.10 RKO Call (KO @ 7.41)	Click here	40 bps		200 bps	48 bps	8 bps
	08-Oct-24	Long PLN/CZK	Click here	5.870	5.790	6.050	5.813	-0.7%
Rates	16-Oct-24	Receive 10y GBP Swap vs. 10y EUR	Click here	1.32%	1.80%	0.50%	1.59%	-27 bps
	08-Oct-24	Long Corra M5	Click here	96.960	96.810	97.360	97.130	17 bps
	08-Oct-24	Long Corra Z5Z6 Steepener	Click here	-0.105	-0.180	0.100	-0.005	10 bps
	05-Nov-24	Long UK Homebuilders	Click here	12,631.67	12,000.00	15,500.00	12,631.67	0.0%
Source: Macro Hive

Bilal Hafeez – Global Macro

Ahead of the US election I am watching four things:

1. Trump consensus as approximated by long end yields as well as odds markets.
2. The reaction from stocks. While Trump is seen as pro-equity, as Trump odds rose in October, stocks fell alongside bonds while USD rose.
3. The Congress split. Odds of a clean sweep (both houses and presidency won by one party) have reduced recently (Chart 1). A clean sweep for either side raises the chance of major fiscal policy. Yields may be suppressed by a split Congress.
4. Results timing. Georgia and North Carolina are likely to report votes as they count, and the final results could be known by midnight EST (5AM UKT Wednesday). Pennsylvania, Michigan and Wisconsin may not be known until early Wednesday EST. Arizona and Nevada could take even longer.

Dominique Dwor-Frecaut – US Macro

The US elections and the Fed are the main market moving events this week. For a discussion of market consequences of the US elections see here and here, and for our Fed preview see here.

Antonio Del Favero – US Rates

The rise of US yields has been due to a combination of a ‘too dovish’ Fed cutting 50bps, economic data much stronger than expected (Chart 3), and the rise in Trump election odds.

The US election is neck and neck. As an immediate post-election reaction, a ‘Red sweep’ should push US yields to bear steepen. Whereas a Harris win could see some rates rally with some bull flattening.

In the two weeks after the election, we expect a ‘Red sweep’ would see the long end (10Y & 30Y) sell off 30-40bps, while 2Y yields would rise 15-20bp on more hawkish Fed pricing (SFRZ5 could drop to 96). This is despite current market pricing already being more hawkish than the SEP. We expect a Harris win would translate into a 20-25bps rally in the long end, and 10-15bps for the 2Y. That could be a good reentry level for shorts post-elections.

The October NFP was an outlier. The report was affected by the Boeing strike and hurricanes. Combined, they reduced the release by ~100-140k while Governor Waller ‘expected these factors could reduce employment growth by more than 100k in October.’ It was also in contrast to a strong ADP Employment report (+233k). Until last Friday and since August 2022 (when the new ADP report started), when ADP was above consensus, 75% of the time nonfarm and private payrolls were above consensus, too. We believe the ADP Employment for the month is a truer reflection of the labour market.

Long end yields sold off on Friday after the employment report, and rightly so. The rally on Monday has probably been more due to the realisation that Harris’ odds are higher than previously thought.

Ahead, the elections result matters, but if the Fed keeps a dovish posture (wrongly in our opinion), long end weakness has further to go. The combination of immigration first and high productivity now have the potential to deliver noninflationary growth (‘soft landing’), but current very loose financial conditions suggest inflation momentum is not over yet (Chart 4). In the current context, a ’dovish’ Fed would clearly increase the probability of a ‘hard landing’, not of a ‘soft landing’.

Caroline Grady – Emerging Markets

Recent upside surprises on headline inflation will mean a cautious sounding CNB. A relatively stable CZK and core inflation below CNB forecast should nevertheless be enough to ensure another 25bp rate cut to 4% this week. Downgrades to CNB growth forecasts and lower-than-expected wage growth will also support the case for continued rate cuts.

CNB have said repeatedly the easing cycle could be paused or terminated should inflation risks materialise. And with inflation moving higher and policy rates moving much closer to equilibrium, we could see increased commentary on how close we are to a pause on easing.

Henry Occleston – Eurozone & UK Macro

We expect the BoE to cut by 25bp this Thursday. A large uncertainty, however, is what the tone of comments will be around the updated MPR forecasts. Their August base case was built on the weighted probability of three scenarios (one dovish, one less dovish, one hawkish). A hawkish skew to the forecasts was driven by fears of a higher r* and that consumption would bounce back to drive inflation.

As such, there will be at least three number of conflicting elements they will need to contend with:

1. Recent inflation (Chart 5), GDP, wage growth data has tended to undershoot forecasts – DOVISH.
2. The OBR sees the new budget as inflationary early in the horizon, but negative for real disposable income and consumption, and returning to target by the end of the horizon – UNCERTAIN, PROBABLY HAWKISH.
3. The market is pricing more near-term cuts than it was pre-August, which should raise growth and inflation further out.

As such, there will be a lot of nuance around the forecasts, likely with some substantial caveats. Our base case is for inflation to be revised higher towards the end of the horizon, but the positive skew will be reduced, and verbal caveats will be made.

A hawkish outcome would be a softening of the comments around gradual loosening ahead, or indications the budget has lowered the likelihood of the most dovish scenario.

A dovish sign would be indications the budget has not greatly affected the MPC’s expectations for policy, that they have looked through the near-term inflationary impact, or it has actually reduced the hawkish scenario risk.

We have been strategically bullish UK rates for some time, but the Budget has softened this bias. The BoE reaction function is key to the outlook for rates. If the BoE ends up on the dovish side, we would see value again receiving UK short end and positioning for curve bull steepening.

Ben Ford – $-Bloc & Scandies

The US election race is tightening. Election odds have narrowed, and markets are jittery. They have positioned for dollar upside, mostly against the euro (extremely, even). However, if Trump fails to win, we expect a long euro position to outperform for three reasons:

1. The market is too keen to price the ECB cutting cycle.  And while the market has taken recent ECB speak in its stride – for example, with Schnabel noting there remains risks tilted to slower cuts – Henry continues to point to the risk of a 2023 inflation redux.
2. Growth is better than the German narrative suggests.  Sure, Germany is doing poorly with German growth underperforming those across developed economies. However, Europe as a whole is keeping up with its competitors.
3. Risk aversion peaks around elections. The Macro Hive Market Risk Barometer captures changes in risk appetite. We find risk appetite worsens (equal to our index increasing) into the election date before improving drastically post-election (Chart 6).

Viresh Kanabar – Canada

This is an important week for BoC watchers.

Later today, the BoC’s summary of deliberations will be released. Here, we are looking for more details about how quickly the BoC thinks they will return to neutral (2.75%).

Tomorrow, the BoC’s Senior Deputy Governor Carolyn Rogers speaks before the Economic Club of Canada. Her focus is typically on the housing market as well as the functioning of the bond market, given the ongoing QT policy. However, pay attention to her updated views on recent growth data as well.

Friday brings the main event: labour market data. Last month’s report showed jobs growth was stronger than expected, driven by a surge in full-time jobs. However, the slowdown in jobs growth over the past 12 months has resulted in workers (particularly young workers) leaving the workforce, acting as a downward pressure on the labour force participation rate. More recently, this reduction prevented a further increase in the unemployment rate – not exactly reassuring for the BoC.

Beyond this, we pay attention to our diffusion index that has narrowed in recent months as the number of industries creating jobs has shrunk. A weak outturn would all but cement another 50bp cut in December.

We remain long Corra M5 futures and the Z5Z6 steepener.

(The commentary contained in the above article does not constitute an offer, a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)