As Goldman’s chief economist Jan Hatzius writes this morning, perhaps as he looks at the overnight chart of the S&P, stimulus odds are lower following President Trump’s announcement that talks with Speaker Pelosi have ended. He adds that “very limited fiscal measures are possible on a piecemeal basis, like airline aid, but not some of the larger items such as stimulus payments that the President has suggested Congress consider as a standalone policy.” His conclusion, as we have said all along is that “more substantial fiscal support is likely post-election and will depend on the election outcome.”
Before we present the full details of Hatzius’ note looking at “Plan B” in the Fiscal stimulus fight, a quick reminder on what we reported over the weekend were BofA’s post-election stimulus scenarios:
“Supersized” ($3.5tn): This scenario assumes the Democrats sweep the November elections and pass a bill that closely resembles the $3.4tn Heroes act passed by the House Democrats in May. The bill would include a second round of stimulus checks, $1tn in State and Local aid paid out in two installments and an extension of the $600/week additional unemployment. Even under a Democratic sweep, the likelihood of a bill of this magnitude passing is low given that the economic recovery has been much faster than what was anticipated in May.
“Baseline” ($1.5tn): This is our current assumption and assumes that Biden wins the presidential election and Congress control remains split. Similar to the extreme scenario, the bill is expected to include another round of stimulus checks, $500bn in aid for state and local governments and an extension of the additional unemployment benefits but at a lower rate. Expect a similar sized bill if Trump were to be reelected and Congress control remains split.
“Skinny” ($0.5tn): This scenario assumes a Republican sweep of the elections, Under this scenario, the Republicans would move forward quickly with a skinny deal targeted primarily at money for the PPP program and unemployment insurance. Expect an earlier passage than the other two scenarios even though Democrats would still hold the House until January.
Then there is the question of what the market, which amusingly was “convinced” that Biden is set to win, was actually expecting. Here is how Rabobank’s Michael Every broke down the market’s paradoxical response to the Trump tweet:
The market certainly didn’t like the Trump stimulus news, of course, with US stocks closing down and 10-year Treasury yields dropping from an intraday high of 0.79% back to 0.73%. The US Dollar also went up. (Include that in the note to Roach.) As such let me, like a US secret service agent, strap on a hazmat suit and wade into the silliness of Streetiness: why did stocks and yields fall on that news, exactly?
If the prevailing view was already of a Democratic sweep in November with stimulus to follow, then surely the “ACB > stimulus” Tweet should have hammered home that meme and seen yields spike more in anticipation? Unless The Street is now seeing the House in play too for Trump….in which case the promise is again of stimulus after the election, so stocks and yields should still have gone up. Or is The Street guessing Trump will win the House and then not use stimulus? Such deep thoughts!
Deep thoughts indeed, and here are some more from Goldman on what happens next:
1. President Trump’s announcement that he has instructed Secretary Mnuchin to end talks with Speaker Pelosi on a COVID relief bill likely signals that the odds are very low that Congress will pass a large fiscal package before the election. While we had not expected further pre-election fiscal relief, these developments are still surprising, for two reasons. First, the President himself had pressed publicly for an agreement just a few days earlier, so this represents an abrupt shift. Second, one would expect politicians in both parties to want to continue negotiations, if only to maintain the appearance of progress as the election approaches. While President Trump’s decision to call off further negotiations might be an attempt to put political pressure on Speaker Pelosi to compromise, this seems unlikely to produce an agreement on a large fiscal package.
2. The focus now looks likely to turn to piecemeal legislation. Last week, Speaker Pelosi indicated she would be willing to put a standalone bill providing additional relief to airlines on the House floor for a vote. In addition, on Tuesday (Oct. 6), President Trump endorsed standalone legislation to provide more funding for the Paycheck Protection Program (PPP) and another round of stimulus payments ($1,200 per individual). However, the President already supported these policies, so while this represents a shift in legislative strategy, it does not represent a change in position.
3. A piecemeal approach might allow for only a very limited amount of fiscal relief. Since the White House and Democratic leaders appear to support standalone airline relief legislation, enactment of another $25bn in airline aid looks increasingly likely. Passage of standalone legislation authorizing another round of PPP loans for hard-hit businesses is possible but not likely, in our view. A standalone PPP bill is possible as members of both parties support it, but it is unlikely because lawmakers in both parties would likely want to attach additional measures to such a bill, like a renewal of the expired extra $600/week unemployment benefit, or aid to schools. If so, a simple standalone bill could quickly become a renewed negotiation over a broader fiscal package. A standalone bill to authorize another round of stimulus payments to individuals is even less likely, as neither party has made this a priority even though both parties appear to support such payments as part of a broader package.
4. Broader fiscal relief looks like a post-election issue. If the election results in a status quo election outcome (i.e., Republican White House and Senate, Democratic House) then Congress might pass some fiscal relief measures in a lame-duck session of Congress before the end of the year, including further PPP funds, a partial extension of the extra unemployment benefit, and money for schools. By contrast, if Democrats win control of the White House and Senate, we would expect Congress to enact a much larger fiscal package, as we recently described, but we would not expect it to pass until early 2021.