Trump’s Stimulus Shock Seen Opening the Door for More Fed Action

(Bloomberg) -- President Donald Trump’s nixing of further stimulus negotiations raises the chance of more steps from the Federal Reserve, and delays -- rather than eliminates -- the potential for further fiscal aid, according to strategists.

While some expressed their astonishment at Trump’s move, others suggested it was in line with his election strategy of seeking to blame the Democrats for the economy. His declaration forces a recalibration of thinking for Wall Street, which had been largely factoring in another stimulus package.

Here’s what a selection of strategists are saying:

More QE

The collapse in talks “increases the likelihood that the Fed will strengthen its quantitative easing program by moving to an open ended economic outcome-based program with a longer duration skew in its purchases in December,” said Sarah Bianchi, the head of U.S. public policy at Evercore ISI.

“If there is a serious loss of momentum in the fourth quarter as fiscal savings are exhausted and the prospects for fiscal remain severely challenged after the election, the Fed may also increase the pace of QE from $120 billion a month to $150 billion or $160 billion.”

Makes ‘No Sense’

“Why nix any further talks just a month before the election? It makes almost no sense that Trump would not want some equity market momentum (which we had on the back of renewed talks between Pelosi and Mnuchin) and perhaps you even get the kicker of some economic momentum,” RBC Capital Markets economists Tom Porcelli and Jacob Oubina wrote in a note Tuesday.

“The perplexing decision forced us to stretch for rationale. We even entertained the idea that perhaps it was all a bluff to extract some last-minute concessions.”

Market Pressure

“We’d expect a near-term breach of 3,271 to restart negotiations,” wrote BTIG LLC’s chief equity and derivatives strategist, Julian Emanuel, referring to the level of the S&P 500 which closed just below 3,350 on Tuesday.

“While it is difficult for us to fathom how any incumbent dare face the voters without having passed new stimulus, Tuesday’s events open up the potential for immediate downside to the S&P 500’s 200-day moving average around 3,113 and reinforces the idea that the outcome of the election is likely to be unclear, contested or both.”

Only a Delay

“Hopes for a stimulus deal before the election were limited, but a thin trading session allowed for risk aversion to be amplified,” said Edward Moya, senior market analyst at Oanda Corp. in New York.

“Trump is doubling down on his strategy to blame the Democrats for the economy,” he added. “Trump’s decision only delays fiscal stimulus and will likely be met with some further accommodation by the Fed.”

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