Global Politics: More Clarity On Leadership—Now What About Policies? 
The next few weeks should provide more clarity on politics and fiscal policy.

In the U.S., with the mid-term elections just a week away, polling suggests that Republicans have opened up a lead in the popular vote. Unless this changes substantially between now and election day, Republicans will very likely take control of at least the House of Representatives since they have gained a greater share of House seats than their share of the popular vote in each of the last five congressional elections.

The Senate races remain too close to call. However, if Republicans control even one house of Congress, fiscal gridlock is likely to ensue, with no further major changes in tax or spending policy likely to be enacted before 2025, after the next presidential election.

Some greater political clarity is also likely to emerge overseas. The next week should see a new British prime minister enter office, hopefully providing some reassurance to local markets which have been battered by the political and policy instability of the last few months.

Next Sunday will also see the final round of the Brazilian presidential election between Lula and President Bolsonaro, candidates with radically different views on how to address the country’s challenges. Recent polling suggests a tightening race with the outcome now much too close to call.

In sharp contrast, there is little political uncertainty in China as President Xi embarks on his third five-year term in office. However, there is policy uncertainty in the wake of the 20th Chinese Communist Party Congress, with short-term questions on how China may modify its approach to dealing with Covid-19 and longer-term questions about both domestic economic policy and China’s economic and diplomatic relationship with the rest of the world. All of this may become clearer now that the country’s leadership structure has been settled for the next few years.

Central Banks—Timing The Inevitable Pivot
And then there is monetary policy. While central bankers are aware of the ongoing weakening in the global economy, they are, for the most part, focused on bringing inflation down to their targets. The Bank of Canada will likely raise rates by 75 basis points when they meet on Wednesday in anticipation of a similar move by the Federal Reserve next week. The European Central Bank is also expected to hike rates by 75 basis points on Thursday as is the Bank of England one week later. By contrast, the Bank of Japan is expected to maintain its current slightly negative policy rates and yield curve control when they meet on Friday. However, slowly rising core inflation and wages gains and a very sharp decline in the yen exchange rate will put pressure on the BOJ to accept a higher target on long-term interest rates in the months ahead.

The Federal Reserve, which meets on November 2, is widely expected to raise the federal funds rate by 0.75%. However, its signaling on its December move is very important. As of this morning, the fed funds futures market is pricing in a 44% shot of a further 75 basis points in December. On November 2, in the FOMC statement and in Jay Powell’s press conference, the Fed could well try to guide market expectations on this issue, either by stating that further rate hikes are likely to be more moderate or that aggressive tightening is still warranted for some time to come. Their language on this issue will be very important with any softening in their tone likely boosting stocks and bonds and hurting the dollar or more hawkish language having the opposite effects.

U.S. equities rallied strongly last week with the S&P500 climbing by 4.7%, despite a rise in 10-year Treasury yields to their highest levels in almost 15 years. Even with these moves, the broad trend in markets this year has been sharply down. While some of this move is likely justified by worsening growth and inflation prospects, some may also represent an uncertainty discount where investors demand compensation for the greater risks that have hovered overgrowth, inflation, geopolitics and monetary policy this year. While the next few weeks may not provide a market-friendly resolution of these uncertainties, less uncertainty should, on its own, be a positive, providing some hope of better returns for diversified portfolios in the months ahead, than 2022 has provided so far.

David Kelly is chief global strategist at JPMorgan Asset Management.

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