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Democrats appear to be on track to win both of the runoff contests in Georgia, giving them an effective majority in the Senate. Kim Parlee speaks with Priya Misra, Global Head of Rate Strategy, TD Securities, about the potential impact on markets, the economy and USD.
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[MUSIC PLAYING]
- Priya, at this time we're talking-- I mean, the results are not completely final for both seats. But it's certainly looking to be what you called in your note, the blue ripple, in terms of the Georgia runoff versus the blue wave. Can we just start with the fact that this really wasn't priced into the markets, was it?
- It wasn't priced in. Yes. I think it's a historic moment actually for Georgia to flip board seats. Now I would say political risk is notoriously hard for markets to any way pricing, because you get these binary outcomes. So it's very hard to price in.
Polls have been wrong in the past. So even though the polls were suggesting a very close election, I think the market was pricing in at least one seat staying Republican. So the fact that if both are moving, which is what it seems like to Democrat, that actually moves Democrat controlled Senate, now we're talking about-- the reason we're not calling it a blue wave is it's still 50-50. And therefore, the vice president has that tie-breaking vote. So literally one Senator can hold something up.
But still, the Democrats control you know-- Chuck Schumer, who's the Senate Majority leader will control the agenda, will control the calendar. I think the market's pricing in Fisc alone. We're pricing in stimulus. And that's why I think the rates market is moving significantly here, because we're talking about more supply, higher rates.
I think now it's all about how much can they get done? What type of policies will they actually get done? But the assumption that the market has had since the November 3 election of divided government, I think you have to question that after what happened last night.
- It's interesting because, as you know, because you follow this closer than anybody, is the devil is probably in the details. When you talk about the fact that one senator can change their mind one way or another, I mean, it's-- the law-- the lines are not drawn red and blue quite as people see them. There's a lot of purple in there that could muddy the waters in terms of policy. Tell me a bit about just what you're expecting to see then, in terms of how the markets digest this over time.
- Sure. So I think you've got that knee-jerk positioning repricing that's been happening overnight and this morning. But I think when we start to get a sense of policy priorities from the Biden administration-- and I think we are going to be watching what they will say-- but exactly to your point, I think the very extreme measures are going to be harder to get through this Senate. It's going to be harder to get through the House as well. So we don't expect very business unfriendly measures.
We don't expect tax hikes just yet. And I think there was some nervousness about this last night. And we're still in the midst of a pandemic. The vaccines have just started to be rolled out. It's been a slow process.
So our thought is that the first half of the year for the Biden administration is going to be all about COVID, which is why I think some fiscal stimulus is likely. Maybe it's vaccine related, or state help for reopening, you know, something like that, stimulus checks. We do expect some stimulus, which is actually going to help risk assets. It's going to probably move rates higher. All eyes will be on the Fed, whether they actually try and offset some of this by keeping rates low in order to allow the economy to continue to recover. So I think it's more COVID.
And then I would argue the climate agenda or the green agenda is what-- once COVID is somewhat under control, once the vaccines are being deployed, I think that's the next thing that the Biden administration will try and push through. But again, nothing I think, too aggressive, just given that it's not a blue wave. It's this blue ripple as we're calling it.
- Yeah. And you saw that-- a lot of green, I'll say, energy equities catching a bid this morning on the news of that. Let me ask about the US dollar though. Because with people have been watching it come down, what does this mean for that?
- So we've been bearish dollar for a while. And after last night's outcome, we're actually even more bearish dollar. Because if you do get fiscal stimulus, if you get some growth positive developments now, given that at least you have Senate, House, and the presidency from the same party. That's positive for growth, but it's more positive for, we would argue, global growth, rather than the Trump four years of, I guess, more the America First policy.
So if it's positive for global growth, I think that that would argue that the dollar can continue to weaken. We expect some flows to come into the US. And that can try and support it. So it doesn't have to be a straight line down for the dollar. But we are bearish. We think this is just the starting of a longer term bearish trend for the dollar for the next few years, actually.
- What about-- I mean, there's a lot of political theater going on right now. I won't kind of get into the specific details. But there's a lot happening. How closely are you watching that? I mean, is it noise, or does it have material impact?
- I think it's just noise. I mean, if the certification process can get delayed, I think given that the Supreme Court has weighed in, the different regional courts have weighed in, there hasn't been much evidence of fraud in the election. I think this is a process to stall it, delegitimize the Biden administration from the get go. I think that's what-- this is more political theater. The market I think doesn't really react unless we have enough of a majority in both House and the Senate to actually not certify the results.
Just tracking the House and the Senate and the number of people that actually want to push back against the certification, that the numbers are just not there. So we think it's really a couple of hours, maybe a couple of days. But the market, I think, is going to looking beyond, and saying after January 20, you've got a different administration, different priorities. The one thing I think, it's a new year, but we're all going to be still watching COVID, vaccines, and I would say fiscal policy as much as we did last year, because now actually maybe Congress can get something done.
- Priya, always a pleasure. Thanks so much.
- Thanks.
[MUSIC PLAYING]
- Priya, at this time we're talking-- I mean, the results are not completely final for both seats. But it's certainly looking to be what you called in your note, the blue ripple, in terms of the Georgia runoff versus the blue wave. Can we just start with the fact that this really wasn't priced into the markets, was it?
- It wasn't priced in. Yes. I think it's a historic moment actually for Georgia to flip board seats. Now I would say political risk is notoriously hard for markets to any way pricing, because you get these binary outcomes. So it's very hard to price in.
Polls have been wrong in the past. So even though the polls were suggesting a very close election, I think the market was pricing in at least one seat staying Republican. So the fact that if both are moving, which is what it seems like to Democrat, that actually moves Democrat controlled Senate, now we're talking about-- the reason we're not calling it a blue wave is it's still 50-50. And therefore, the vice president has that tie-breaking vote. So literally one Senator can hold something up.
But still, the Democrats control you know-- Chuck Schumer, who's the Senate Majority leader will control the agenda, will control the calendar. I think the market's pricing in Fisc alone. We're pricing in stimulus. And that's why I think the rates market is moving significantly here, because we're talking about more supply, higher rates.
I think now it's all about how much can they get done? What type of policies will they actually get done? But the assumption that the market has had since the November 3 election of divided government, I think you have to question that after what happened last night.
- It's interesting because, as you know, because you follow this closer than anybody, is the devil is probably in the details. When you talk about the fact that one senator can change their mind one way or another, I mean, it's-- the law-- the lines are not drawn red and blue quite as people see them. There's a lot of purple in there that could muddy the waters in terms of policy. Tell me a bit about just what you're expecting to see then, in terms of how the markets digest this over time.
- Sure. So I think you've got that knee-jerk positioning repricing that's been happening overnight and this morning. But I think when we start to get a sense of policy priorities from the Biden administration-- and I think we are going to be watching what they will say-- but exactly to your point, I think the very extreme measures are going to be harder to get through this Senate. It's going to be harder to get through the House as well. So we don't expect very business unfriendly measures.
We don't expect tax hikes just yet. And I think there was some nervousness about this last night. And we're still in the midst of a pandemic. The vaccines have just started to be rolled out. It's been a slow process.
So our thought is that the first half of the year for the Biden administration is going to be all about COVID, which is why I think some fiscal stimulus is likely. Maybe it's vaccine related, or state help for reopening, you know, something like that, stimulus checks. We do expect some stimulus, which is actually going to help risk assets. It's going to probably move rates higher. All eyes will be on the Fed, whether they actually try and offset some of this by keeping rates low in order to allow the economy to continue to recover. So I think it's more COVID.
And then I would argue the climate agenda or the green agenda is what-- once COVID is somewhat under control, once the vaccines are being deployed, I think that's the next thing that the Biden administration will try and push through. But again, nothing I think, too aggressive, just given that it's not a blue wave. It's this blue ripple as we're calling it.
- Yeah. And you saw that-- a lot of green, I'll say, energy equities catching a bid this morning on the news of that. Let me ask about the US dollar though. Because with people have been watching it come down, what does this mean for that?
- So we've been bearish dollar for a while. And after last night's outcome, we're actually even more bearish dollar. Because if you do get fiscal stimulus, if you get some growth positive developments now, given that at least you have Senate, House, and the presidency from the same party. That's positive for growth, but it's more positive for, we would argue, global growth, rather than the Trump four years of, I guess, more the America First policy.
So if it's positive for global growth, I think that that would argue that the dollar can continue to weaken. We expect some flows to come into the US. And that can try and support it. So it doesn't have to be a straight line down for the dollar. But we are bearish. We think this is just the starting of a longer term bearish trend for the dollar for the next few years, actually.
- What about-- I mean, there's a lot of political theater going on right now. I won't kind of get into the specific details. But there's a lot happening. How closely are you watching that? I mean, is it noise, or does it have material impact?
- I think it's just noise. I mean, if the certification process can get delayed, I think given that the Supreme Court has weighed in, the different regional courts have weighed in, there hasn't been much evidence of fraud in the election. I think this is a process to stall it, delegitimize the Biden administration from the get go. I think that's what-- this is more political theater. The market I think doesn't really react unless we have enough of a majority in both House and the Senate to actually not certify the results.
Just tracking the House and the Senate and the number of people that actually want to push back against the certification, that the numbers are just not there. So we think it's really a couple of hours, maybe a couple of days. But the market, I think, is going to looking beyond, and saying after January 20, you've got a different administration, different priorities. The one thing I think, it's a new year, but we're all going to be still watching COVID, vaccines, and I would say fiscal policy as much as we did last year, because now actually maybe Congress can get something done.
- Priya, always a pleasure. Thanks so much.
- Thanks.
[MUSIC PLAYING]
