A turbulent 2020 is nearly over with one last Federal Reserve meeting. Joseph Trevisani and Yohay Elam preview the world's most powerful central bank meeting and move toward 2021, They clash on outgoing-President Donald Trump's legacy, President-elect Joe Biden's moves, and what it means for markets.
Joseph Trevisani: Next week's Fed meeting is interesting. No rate or bond program change expected. But we have the Projection Materials...which the Fed likes to pretend aren't forecasts. They should begin to show some optimism... the Atlanta Fed GDPNow model is running at 11.2% for the fourth quarter. There is a great deal of potential for growth.
Yohay Elam: On the other hand, the jobs report disappointed. America's economy gained only 245,000 jobs in November. Which would be great in pre-pandemic times, but was half the expectations. Do you think the Fed could react to that?
Joseph Trevisani: If the Fed projections are improved or if Jerome Powell the chairman can manage some positive spin at the news conference. Equities will run. It may even be enough to help the Dollar. Yes, I still think we have a two track economy. Notably, initial claims came back to trend...and it was not the first upward blip in claims...
Yohay Elam: I think the recovery screeched to a halt in November. It's not only claims but also Nonfarm Payrolls. And the economy is likely struggling also now in December.
Joseph Trevisani: I'm not so sure. I can imagine employers holding off on hiring until the pandemic picture is better...
Yohay Elam: I wouldn't be shocked to see a negative NFP for December.
Joseph Trevisani: But claims do not show any surge in the firing.
Yohay Elam: As employers are holding off, the Fed will likely wait as well. Especially as the vaccine is coming.
Joseph Trevisani: Exactly. The timing may be up in the air but recovery is pretty certain in the first and second quarters. Equities certainly think so and Treasury rates would be rising sharply absent the Fed put.
Yohay Elam: The Fed will also wait for stimulus. It seems closer now. As far as I understand, both parties are in agreement about the sum, around $900 billion, but still at odds about the details.
Joseph Trevisani: It will come the only question is whether the Democrats will postpone it so they can get full credit.
Yohay Elam: Or if McConnell reverts to being a fiscal hawk, getting ready to lead the resistance, as he was back in Obama's years. Another reason to expect the Fed to stay put is that they told us so. We’re still looking to see how things are going to work themselves out” before making decisions about whether to provide the additional stimulus that's Charles Evans of the Chicago Fed, just before the blackout period.
Joseph Trevisani: I agree, the Fed is not going to do anything. Still, a bit of optimism from Powell, which is not out of the question could go a long way for the markets.
Yohay Elam: Will markets respond positively to optimism? I'm not sure, as they tend to cheer more QE. And the Fed said in November that it discussed the size of its bond-buying scheme.
Joseph Trevisani: I think both will work. I expect another stimulus package..but probably after a new Congress is seated.
Yohay Elam: The size and content of the 2021 package heavily depend on those Georgia runoffs.
Joseph Trevisani: Yes, if the Republicans lose the Senate. I expect the bill to be larger.
Yohay Elam: Indeed. I would define the latest opinion polls in Georgia as "too close to call". Contrary to Wisconsin, presidential polls in the Peach State were accurate, but when the margins are close to nothing, it's a toss-up.
Joseph Trevisani: It will be an interesting election. I expect the Republicans will be paying attention to the count this time. Equities have definitely made the decision on stimulus and the economy.
Yohay Elam: A flood of money from the Fed, a decisive election, and an upcoming vaccine. Nothing not to like. And investors know the Fed will always be there.
Joseph Trevisani: I think the Fed bond program has kept the dollar weak. Elections yes, though with many questions, decisive, no. The Republicans gained at least 12 seats in the House and are well situated to take control in 2022...
Yohay Elam: Democrats underperformed expectations but still won the presidency from an incumbent and kept control of the House.
Joseph Trevisani: My guess is we will have a divided government for the next four years as we have a divided nation. The Constitution delivers an accurate representation of the nation.
Yohay Elam: The nation is divided undoubtedly. Would a dual Democratic win in Georgia boost markets and a loss send them down?
Joseph Trevisani: I do not expect the President's legal challenges to overturn the election, but the questions are serious and will no doubt resonate throughout the next Presidency.
Yohay Elam: Trump lost some 50 lawsuits, which keep the Loser image alive.
Joseph Trevisani: Loser is the rhetoric of the Democrats.
Yohay Elam: The last time an incumbent lost was 1992.
Joseph Trevisani: Sort of like Clinton last time. I try to avoid it.
Yohay Elam: Clinton lost and conceded.
Joseph Trevisani: And then spent four years undermining and complaining the election was stolen. At any rate, I don't think there is any profit in old battles.
Yohay Elam: Indeed. He lost and that's it. Markets are focusing on Georgia in terms of politics.
Joseph Trevisani: If the Democrats win the Senate Wall Street's all in contributions for Biden will be needed to stave off the anti-business legislation the left will demand.
Yohay Elam: The Dodd-Frank act passed under Obama with Biden as VP. I don't think a 50-50 Senate can pass anything big anyway. I don't see any big reforms.
Joseph Trevisani: Though the Democrats will be wary of enabling the left considering the results in the House. It seems likely that Pelosi's refusal to pass a second stimulus bill before the elections cost those House seats.
Yohay Elam: Only a sounder, non-chaotic management.
Joseph Trevisani: I tend to agree. The election was not an endorsement for the left's wish list.
Yohay Elam: It is McConnell who denied both Pelosi and Trump more stimulus.
Joseph Trevisani: We shall see. Certainly the Chinese are rejoicing. And the Iranians.
Yohay Elam: On the contrary.
Joseph Trevisani: Even with a China-friendly Biden administration, I don't think the trade relationship can revert to what it was.
Yohay Elam: Trump went against all over the world. Biden is more likely to organize other countries against China.
Joseph Trevisani: Firms will be far warier of investing in China now.
Yohay Elam: The delisting act had bipartisan support. Trump has business interests in China. He praised Xi's handling of coronavirus. I think markets will not like Biden's more successful approach against Beijing.
Joseph Trevisani: I disagree. Biden will do nothing against China. He is the purest status quo ante bellum. Trump started the trade war. Nothing else matters with China. We shall see and have to disagree on this.
Yohay Elam: Trump only cared about himself, selling out on Intellectual Property for soybeans, to get more votes. Obama and Biden got the TPP, a trade deal that excludes China.
Joseph Trevisani: That is an opinon.
Yohay Elam: Trump's exit of the TPP, worsening relations with Europe, and business interests in Europe are all facts.
Joseph Trevisani: There are other opinions on the Trump-China relationship and the purpose and results of the trade war. At any rate, I don't think the relationship reverts to pre-Trump.
Yohay Elam: The result of the trade war is the Phase I deal.
Joseph Trevisani: Has Biden said what he will do with that?
Yohay Elam: The relationship will not revert to pre-Trump. Biden said he would not lift tariffs but first consult allies. Trump said Europeans are foes.
Joseph Trevisani: He has said he will reenter the Obama deal with Iran. Though again, I don't think he can. Yes, I believe he was talking about NATO contributions.
Yohay Elam: With Iran, it will probably be a "more for more" agreement a more comprehensive deal, but that is to be seen I think Biden will first focus on domestic policy. Praising Putin and calling Europeans foes.
Joseph Trevisani: I think Trump has rearranged the world and foreign relations in a way that the changes can not be undone.
Yohay Elam: He tried to undo Obama's policies, breaking the Iran deal that the Israeli military-backed. And becoming best friends with Kim Jong-un. For nothing. Anyway, Iran's policy is unlikely to impact markets.
Joseph Trevisani: Yes without oil, which is now controlled by the Americans, Iran, and the Middle East in general is less important.
Yohay Elam: If Biden succeeds in promoting green energy, the Middle East would become less important.
Joseph Trevisani: It is even possible that the alignment of the Gulf Sunni states with Israel will bring about lasting positive changes. It is the first hopeful development there in a generation. I am not very hopeful that green energy will do anything except make well-connected companies rich with subsidies.
Yohay Elam: Hopefully, the recent accords ended no wars, but are undoubtedly a positive development green companies will have politicians in their pockets like the oil-rich Koch brothers had Republicans? Possibly.
Joseph Trevisani: US energy independence is good for the US and the world and it is definitely good for the US consumer.
Yohay Elam: High oil prices brought about the shale industry and also green energies.
Joseph Trevisani: I don't think a Biden administration would be able to reverse the Trump Middle East policy for the simple reason it is based on local realities. It benefits both the Gulf states and Israel.
Yohay Elam: Every president from both parties sought out to bring peace in the Middle East with no success. Local realities are difficult.
Joseph Trevisani: Yes, as the old adage goes...High prices are their own cure. That could work for green energy also, but with the current technology, oil prices would have to be much higher. Trump seems to have been the most successful presidency in the Middle East since the Carter Egypt Israel treaty.
Yohay Elam: I wouldn't attribute these accords to Trump, nor the peace agreement with Egypt to Carter. Sure, America gave a push, but moving closer depends on local interests first and foremost.
Joseph Trevisani: True, the parties themselves are ultimately responsible. But without the withdrawal from the Iran treaty, the change never would have happened. I disagree, Trump gets credit for creating the change and the atmosphere that enabled the Gulf states' relationship with Israel. It is the most positive development in a generation. It's a good thing, even if Trump is responsible.
Yohay Elam: Peace is a good thing, even if it doesn't end any war and even if Trump gave a helping hand.
Joseph Trevisani: Ha. I understand this is difficult. Our conversations are a glimpse of the next four years.
Yohay Elam: Indeed, when Valeria is back we'll be more focused on markets... We promise!
Joseph Trevisani: Even if Trump concedes, which I fully expect him to do, Will continue to dominate the political conversation. I think perhaps so.
Yohay Elam: I don't think he will dominate the conversation but he will certainly remain a force in the Republican Party. He will never concede.
Joseph Trevisani: I disagree.
Yohay Elam: Being a winner is a critical part of his brand.
Joseph Trevisani: But we will know soon enough. The JOLTS survey was strong ..but it was October. One company that should be worried it Twitter. If Trump closes his account and moves to another platform, millions will follow, and every journalist.
Yohay Elam: He'll get a prime-time show on Fox with his special page or platform.
Joseph Trevisani: Fox... hardly he hates Fox.
Yohay Elam: They are the only ones with pockets to pay him. And he's in debt.
Joseph Trevisani: No for long, their viewership has plummeted.
Yohay Elam: I don't think he'll go with a small network. Anyway, even without Trump, politics will surely remain interesting especially in 2022, after the pandemic and ahead of the Mid-Terms. But I still think that the Fed will have the most significant impact on markets.
Joseph Trevisani: I think we will find a return to market interest in the second quarter with a buoyant US and global recovery.
Yohay Elam: Yeah, a horrible winter, worse than we think. Followed by a blooming spring, better than we think.
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