“I think we’re getting close to an outcome,” says Republican Senate Majority Leader Mitch McConnell after US President Donald Trump was whisked away to hospital after contracting Covid-19. For weeks, the US Senate has been deadlocked over fiscal stimulus, with Democrats and Republicans disagreeing over the amount. But Bank of Singapore (BOS) Chief Economist Mansoor Mohi-uddin thinks Trump’s hospitalisation could pave the way towards a compromise.
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The signs for a new fiscal stimulus agreement look promising. Democrat Speaker of the House of Representatives Nancy Pelosi was on record during the weekend stating that the news of Trump’s condition could increase the urgency of approving further emergency aid. Democrats have been holding out for a US$2.2 trillion ($2.99 trillion), blocking a US$500 billion Republican stimulus package in September on grounds that it was an inadequate response to the downturn.
And the US needs fiscal stimulus fast to rescue its flagging economy. “The US economy is continuing to rebound but its momentum is slowing as the easy gains from reopening activity over the summer have now been realised,” warns Mohi-uddin. So far, the US has only regained 11.417 million of the 22.160 million jobs lost from the pandemic in March and April. Unemployment remains stuck at 7.9% in September (down from August’s 8.4%) above pre-crisis levels of 3.5%.
Without fiscal stimulus, Washington will not be able to support US income levels until a viable Covid-19 vaccine is made available. Congress had previously agreed two rounds of emergency aid for households, a temporary rise in unemployment benefits, extra funds for state and local governments, and loans for businesses to retain workers worth US$3 trillion. While this boosted incomes sharply and maintained consumption levels, about half of that aid has run out, leading to incomes flailing again.
Congress may wait until US elections in November to pass the measures, but the improved likelihood of fresh stimulus will undoubtedly cheer up financial markets. Mohi-uddin expects a return to trends from the summer, which saw a favourable environment for fixed assets, a weaker greenback and a steeper US Treasury curve accompanied by low yields.
“The near-term outlook remains uncertain ahead of the US elections. But the tail risk of a close race on November 3 being disputed will ease if Donald Trump’s hospitalization makes the president fall further behind his challenger, Joe Biden, in the polls,” writes Mohi-uddin.
The BOS Chief Economist has therefore maintained BOS’s bias towards risk assets. His long-term target for the safe-haven USD is a fall to US$1.25 against the Euro and US$6.55 against the Chinese Yuan. He expects 10-Year Treasury yields to rise as US economic activity recovers, but yields will likely remain low at 0.90% over the next 12 months.
As of 2.18pm, the S&P 500 is trading 60.19 points higher at 3,408.63. The Economist predicts that Joe Biden is very likely to win the US Presidential elections, with a 9 in 10 chance of winning the electoral college. He is seen to win 341 electoral college votes to Donald Trump’s 197. FiveThirtyEight predicts that the Democrats have a 66 in 100 chance of flipping the Senate.
