Week Ahead Preview 7th of November

Markets focus will be on the US congressional midterm elections taking place this week, as members in the house of representatives and the Senate will be up for election. Currently, Democrats control both houses with a narrow majority of 220 out of 435 seats in the former and 48 seats in the latter out of 100. Nonetheless, they count on the help of two independents who vote with them with Vice President Kamala Harris’ (Democrat) vote as the deciding vote.

The results of this election will be key for President Biden’s agenda on all aspects (political, economic, environmental, etc..) as his ability to pass budgets or any kind of legislation will be very limited if Republicans win the majority in either or both houses. Moreover, this election will show Americans’ satisfaction with the current administration’s policy (especially the fiscal one) and could have some major implications such as paving the way for the return of Trump’s candidacy to the presidential elections in 2024 or even putting the incumbent president’s candidacy for a second term at stake.

So how may markets react in any of only three scenarios?
 

• The first (a split congress) could have a negative effect on the equity markets, as it would keep it stuck in bipartisan issues and unable to pass much of fiscal incentives, and this could help the Federal reserves to bring inflation levels to the 2% target. 

 

• The second (Republicans win both houses) is like the first scenario as the Republicans could keep on blocking Democrats’ attempts to pass public budgets easily. On the other hand, they may press to increase oil and gas production and increase energy exports.

 
 

• The third, (Democrats win both houses) would be positive for the equity market as the administration will be able to carry on in the current agenda and provide fiscal support to the economy when needed however, this would hinder the Fed in achieving its mission of bringing inflation levels to 2%.

Most of the US indices closed in the red last week due to the Federal Reserve chairman’s affirmation of maintaining a tight monetary policy until inflation levels are broght down to the 2% target. However, the market rebounded higher on Friday after the job data showed an increase in unemployment rates from 3.5% in September to 3.7% in October. Investors welcomed this news as it could bring the US central bank closer to easing, given its focus on reducing the labor market’s demand which feeds inflation.
 

Economic data highlights 
 

Monday 7^th of November 

·         CHF- Unemployment Rate (OCT)

·         EUR- Global Construction PMI (Germany-OCT)

·         USD- Consumer Credit Change (SEP)
 

Tuesday 8^th of November 

·         AUD- Consumer Confidence Index (NOV)

·         USD 2022 Midterm Elections

·         EUR- Retail Sales (SEP)
 

Wednesday 9^th of November  

·         CNH- Inflation Rate (OCT)

·         USD- Wholesale Inventories MoM (SEP)
 

Thursday 10^th of November 

·         USD- Core Inflation Rate (OCT)

·         USD- Inflation Rate (OCT)

·         ZAR- Gold Production (SEP)

·         ZAR- Mining Production (SEP)

·         ZAR- Manufacturing Production (SEP)
 

Friday 11^th of November  

·         EUR- Inflation Rate Final (Germany- OCT)

·         GBP- GDP Growth Rate (Q3)

·         GBP- Industrial Production (SEP)

·         USD- Michigan Consumer (NOV)
 

 The US Inflation Report    
 

 On Thursday all eyes will be on the US CPI report (inflation) of October. Inflation rates in the US hit a 40-year high 40-year high at 9.1% in June, and since then the Fed started an ultra-tight monetary policy, hiking the rate by 75bp in every meeting. This led inflation levels to decelerate however, remained over 8%.

Markets expect the inflation headline to retreat from 8.2% in September to 8% in October, and the core inflation rate to fall to 6.5% hence, any higher-than-expected read, especially on the core inflation side, would increase the odds of another 75bp rate hike in December