Markets ended the week with a risk-on bias as hopes built for a US stimulus deal and the market looked for a Joe Biden election victory: the debate is now moving to what extent the Democrats can dominate Congress and the Senate. There was a huge turnaround in the prospects for a stimulus: earlier in the week Trump called off stimulus talks via twitter then offered the hope of piecemeal deals. By the end of the week the talks were back on between Nancy Pelosi of the Democrats and Treasury Secretary Steven Mnuchin as Pelosi pushed for a comprehensive package but pushed back against an increased USD1.8bn offer from the White House saying it was inadequate.
In terms of asset markets the S&P 500 ended the week 3.84%. However, a heavy Treasury issuance schedule and the prospect of a stimulus (with the debate more on the timing of it) weighed on USTs. The UST curve steepened over the week: the 2s30s spread widened 7bps to 142bps. The UST 10-year yield ended the week 8bps wider at 0.78%. The US dollar weakened over the week against this backdrop with the US Dollar index (DXY) down 0.84%.
Over the week, Jerome Powell and a number of Fed speakers emphasised the importance of a further fiscal package. At this early stage in the recovery Powell argued the “risks of policy intervention are still asymmetric” with the risks of not doing enough outweighing the risk of overdoing it. He opined, “Too little support would lead to a weak recovery, creating unnecessary hardship for households and businesses.” Midweek, the FOMC minutes noted participants’ forecasts assumed additional fiscal support which if it were weaker or later could result in a weaker recovery. The “FOMC voters generally agreed its guidance expressed its assessment of the most likely rate path but not an unconditional commitment." Plus, “Most participants supported providing more explicit outcome-based forward guidance for the federal funds” but were split on the best way to do this.
In Europe, the ECB minutes emphasised “there was no room for complacency” and “There were key downside risks to the medium-term outlook for price stability, mainly related to the as yet uncertain economic and financial implications of the pandemic.” The minutes also acknowledged the risk from further euro appreciation to the growth and inflation outlook and that “the euro required careful monitoring”. Elsewhere, growth was a focus in the UK where monthly UK GDP data showed the economy stalled in August growing 2.1% mom against expectations of a 4.6% mom increase. Given that more and more restrictions are being imposed as covid infections rise concerns about the growth outlook are mounting: this prompted Rishi Sunak to announce an expansion of the job support scheme to help businesses impacted by further lockdowns. In China, reacting to the stronger renminbi, the PBoC announced over the weekend that financial institutions do not need to set aside a 20% reserve to purchase foreign currency for clients.