Pelosi Optimistic on Relief, Says Trump's Illness Alters Dynamic
Comment of the Day

October 02 2020

Commentary by Eoin Treacy

Pelosi Optimistic on Relief, Says Trump's Illness Alters Dynamic

This article by Billy House for Bloomberg may be of interest to subscribers. Here is a section:

“This kind of changes the dynamic,” Pelosi said on MSNBC Friday. “Here, they see the reality of what we have been saying all along.”

She said she was optimistic that a bipartisan bill can emerge.

The stimulus negotiations have made some halting progress over the past two months, but the two sides remain far apart on how much of a boost to provide and where it should be directed. Democrats in the House on Thursday passed a $2.2 trillion package -- down from the $3.4 million plan they passed in May -- as their offer in the latest talks. Mnuchin has proposed a plan of about $1.6 trillion.

The negotiations are taking place amid signs the U.S. economy is struggling to recover from pandemic-induced shutdowns. Job gains slowed in September and many Americans quit looking for work, suggesting the economic recovery is downshifting. Americans’ incomes fell in August by the most in three months after the government’s supplemental unemployment benefits expired, the Commerce Department reported Thursday.

Eoin Treacy's view

The PPP moratorium on firing workers expired on Wednesday. That event was greeted with a large number of headline-grabbing layoffs announcements. The continued pace of job growth despite the layoffs got less attention. The big question for markets is when a fiscal deal will be agreed.

The stock market opened lower following the announcement of President Trump’s infection, regained much of the decline following positive statements from Nancy Pelosi and gave that up following cautionary statements from Larry Kudlow. It then rebounded again on renewed enthusiasm for a deal. This is clear evidence traders are highly attuned to the outlook for stimulus.   

Just how seriously affected the Trump family is by the virus is likely to have an influence on how consumers react to social distancing requirements. With schools beginning to reopen the number of infections will rise. If the perception is the majority are mild then reopening can proceed. However, if perceptions are that the majority are severe that will slow down the process and the requirement for additional stimulus will be even more acute.

News today that United Airlines added 30 international routes to its service suggest reopening is occurring one way or another. The speed with which that occurs and the sustainability of the move is probably more about perceptions than facts.

The total value of the Fed’s balance sheet has not moved in six months. My combined total of central bank balance sheet assets continues to lose momentum. My rolling total of global deficit spending is holding around $1.5 trillion, which is below the pandemic peak. The Dollar’s rebound throughout September would also have siphoned liquidity from the market.

The one clear indicator of additional liquidity infusions is M2. It has been making incremental new highs even as the size of the fed’s balance sheet has remained static.

The challenge for investors is the majority of gains in the stock market this year have been boosted by valuation expansion rather than earnings. That’s normal in the early stages of a recovery, but renewed activity is required to sustain the expansion. That would allow earnings to provide some foundation for the optimism already priced in. Additional stimulative measures would certainly assist with that.

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