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11/3/2024
The elections are finally here, and Washington is bracing for what the elections could bring. Frank Kelly discusses what to watch.
Francis (Frank) J. Kelly
Founder & Managing Partner, Fulcrum Macro Advisors LLC and Senior Political Strategist for DWS
At last, the elections are finally here, and Washington is bracing for what Tuesday brings – especially the regulatory world because change is coming one way or another to the regulatory agenda in 2025 and beyond.
It seems like it has taken forever, but the U.S. elections are finally here on Tuesday. It is rather extraordinary when you think of all that is being voted on: A new President, 435 members of the House of Representatives, 33 members of the U.S. Senate, 11 governors, ten state attorney generals, 86 state legislatures in 44 states, and 8 U.S. territories, 22 major city mayors, and countless state and local judges will be elected. And a myriad of state ballot measures covering everything from abortion to taxes to water rights to education reform.
We have spent endless hours analyzing potential market outcomes and implications these past few months. While we believe there is a slight chance the U.S. House of Representatives flips to Democratic control by a slim margin and the U.S. Senate flips to Republican control by a slim margin, we just cannot project two days out who will win the presidency. It all comes down to who will win Pennsylvania and every poll, every data point, every anecdotal story we have heard points to the tightest of margins between former President Trump and Vice President Harris.
The question we get asked most often is: What are we going to be looking at on election night? Our recommendation is to watch Florida first. Trump is almost certain to win the Sunshine State – but by how much? By what margin? If it is a large margin, it is a possible indicator that Trump is having a big night. It may be a good night for Harris if it is not a significant margin. We will also be watching North Carolina – does Trump win, or does Harris surprise with a win? Again, the Tar Heel State will be a good early indicator. Unfortunately, our prediction is Pennsylvania will be close, complicated, and slow to reveal the victor. And if the race is as close as it appears to be now in the Keystone State, markets had better brace for a couple of days of uncertainty.
While virtually the entire world will be glued to televisions and computer screens watching the returns' role in, there are several other major geopolitical events we are watching closely this week. First, despite early indications Iran was not going to strike back at Israel for Israel's recent retaliatory strike on Iran, it now appears sentiment among Iran's leaders has shifted considerably. Two senior Iranian military leaders in the last week have publicly promised to strike back at Israel is a serious and rising risk. The change in stance appears to come as a result of Iran coming to grips with just how damaging Israel's October 25th strike actually was: crippling Iranian air defenses and destroying or crippling major drone production facilities as well as sensitive rocket fuel mixing facilities.
Also, this week South Korean leaders will be meeting with European Union leaders to discuss the recent deployment of approximately 10,000 North Korean troops in Russia, moving to the frontlines to battle Ukrainian forces. We see this as a significant game-changer in the Ukraine War, and South Korea clearly does too. As the South Korean Foreign Minister said Friday, "all possible scenarios are under consideration" which means Seoul is likely to begin sending weapons to Ukraine and possibly sending military advisors and observers to Ukraine. It could also prompt NATO to reverse the current stance of not allowing NATO weapons supplied to Ukrainian forces to be used against Russian troops inside Russia – something Russian President Vladimir Putin has said would cross "a red line."
Looking at the global economic radar screen, this week the big events are all at the central banks.
The Federal Reserve's Open Market Committee meets on Wednesday and Thursday. Markets have factored in a likely 25 basis point cut, but with last week's feeble jobs report, some wonder if the cut will be more.
The Bank of England, the Reserve Bank of Australia, Sweden's Riksbank, Norway's Norges Bank, and the Central Bank of Brazil will also meet this week to discuss interest rates.
Looking at economic data releases this week, in Europe, markets are watching Germany's trade balance, factory orders, and industrial production numbers. France also releases industrial production and trade numbers.
In Asia, the Chinese Standing Committee of the National People's Congress will meet, and markets are watching for any new stimulus measures to stabilize the economy. China will also release trade balance figures. Meanwhile, Japan releases wage figures while the Bank of Japan releases minutes from its September meeting.
And bringing back to the U.S., the ISM services report, productivity and unit labor costs, and the University of Michigan consumer survey are all out this week.
The Fed – The only major event this week is the Federal Reserve’s Federal Open Market Committee (FMOC) meets Wednesday and Thursday to discuss the economy and interest rates. And on Friday, Fed Governor Michelle W. Bowman participates in a conversation on banking topics at the University of Mississippi School of Business Banking and Finance Symposium. The Securities Enforcement Forum is being held on Wednesday, an event bringing together current and former senior SEC officials – mostly enforcement staff – with white-collar attorneys, in-house counsels, and compliance executives. And that is about it for the regulatory calendar this coming week.
The FDIC, BlackRock and Vanguard – This past week saw a ramping up in the fight over the Federal Deposit Insurance Corporation’s (FDIC) efforts to tighten its oversight of how giant asset managers invest in banks. House Republicans let it be known they are not happy with the FDIC’s effort, sending a letter to FDIC Chair Marty Gruenberg objecting. The FDIC is requiring BlackRock and Vanguard to sign agreements this week meant to more aggressively monitor the asset managers’ promises to remain passive investors in banks in which they have big ownership stakes.
The Treasury – Also this past week, Treasury Secretary Janet Yellen said at the American Bank Association’s annual meeting that Treasury believes fraud in the banking system is becoming a huge problem and that her department is now using artificial intelligence to detect and deal with the issue.
The Senate Banking Committee -- Also, anticipating the changes coming to the composition of Congress and what it might mean for the regulatory world, Senator Tim Scott (R.-S.C.), who is the current ranking minority of the Senate Banking Committee, appears to have locked up enough support to become the next Chair of the Senate Banking Committee if control of the chamber flips.
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R-070495-4 (7/25)
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