by Greg Valliere, AGF Management Ltd.
Insights and Market Perspectives
Author: Greg Valliere
November 29, 2021
THE SIMPLE TRUTH this morning is that no one is sure what the Omicron variant will do, and no answers from scientists are likely for another two weeks. Thrice-vaccinated individuals are probably safe, but nothing is certain, which brings us to the world of Washington policy dysfunction, always a dominant uncertainty every December.
THE MOST IMPORT WASHINGTON ANGLE as this new variant spooks the world is that a speed-up of Federal Reserve policies, leading to a rate hike by summer, now looks a little less likely.
WE DON’T EXPECT LOCKDOWNS IN THE U.S. — that’s politically radioactive — but even before the Omicron news late last week it was clear that Covid and the delta variant are far from curbed in this country and abroad. It’s still an economic headwind, despite staggering fiscal and monetary stimulus.
AS THIS FRIDAY’S UNEMPLOYMENT DATA IS LIKELY TO SHOW, the U.S. economy is humming, but the uncertainty of Omicron may reduce concerns about surging inflation and over-heated GDP growth. One week ago the risks to the economy were upside risks; now the risks look more balanced.
AND OF COURSE THERE’S ANOTHER RISK: Policy dysfunction, as Congress returns this week to confront four enormous issues amid the usual partisan bickering that will drag on into next year. Here’s our take on these four issues:
1. A massive defense spending bill, costing about $768 billion, is fairly close to passage, although a controversial amendment to fund more aggressive manufacturing competition with China is not resolved.
2. A government shut-down this Friday will be avoided, as still another continuing resolution will pass, extending funding for a couple of months, maybe more. This is light lifting, the easiest of the four issues to handle.
3. The Senate will begin making changes to the House-passed Build Back Better bill, the $2 trillion cradle-to-grave tax and spending blowout that still doesn’t have support from key Sen. Joe Manchin. A “kick the can” option is possible on this as well.
4. Extension of the federal debt ceiling is necessary by year-end. Senate Majority Leader Chuck Schumer has refused to use the budget reconciliation process to raise the debt ceiling, but he may have to cave on this. Or “kick the can” may become an increasingly likely option. In any event, the U.S. will not default on its debt; if such an unthinkable option is looming, the Fed may have to intervene.
CALL US CRAZY, but the big picture isn’t totally bleak this morning. Congress will do the minimum and avoid train wrecks, while the widely anticipated surge in interest rates may stall until there’s clarity on Omicron. Decent economic growth with fairly steady interest rates and a little less frothy inflation is not a bad scenario.
WE THOUGHT LAST FRIDAY that thinly traded markets over-reacted to this new variant, and we still think that; so much is unknown. Vaccines and testing are the answers, as the world learns to cope with a virus that will be with us — with surges and lulls — for the foreseeable future.
The views expressed in this blog are provided as a general source of information based on information available as of the date of publication and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Speculation or stated believes about future events, such as market or economic conditions, company or security performance, or other projections represent the beliefs of the author and do not necessarily represent the view of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and AGF accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Any financial projections are based on the opinions of the author and should not be considered as a forecast. The forward looking statements and opinions may be affected by changing economic circumstances and are subject to a number of uncertainties that may cause actual results to differ materially from those contemplated in the forward looking statements. The information contained in this commentary is designed to provide you with general information related to the political and economic environment in the United States. It is not intended to be comprehensive investment advice applicable to the circumstances of the individual.
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This post was first published at the AGF Perspectives Blog.
