Will politics derail the markets?
The US presidential election draws deep interest from investors around the world because of the size and importance of the U.S. economy.
PGIM Fixed Income’s chief economist and head of global macroeconomic research, Nathan Sheets, joins CNBC “Squawk Box” ahead of the first of U.S. presidential debate. During the discussion, Sheets shares insights on the implications of the 2020 U.S. election results, including expectations for fiscal and monetary policy, trade, global economic recovery, and more.
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>> Nathan Sheets, Chief Economist, also Head of Global Macroeconomic Research, PGIM Fixed Income, joining us live out of Washington DC. Nathan, good to see and I appreciate your time. I hope you're keeping safe. We are less than an hour 45 away from the start of the first of three US presidential debates. And I know that you, in particular, are going to be listening very closely to anything that has to do with taxes and taxation going up. That's what the market is not going to like. But let's get specific here. Would you agree that it's going to be anything that even hints of a whiff of taxes going up on the higher income bracket as well has anything to do with capital gains tax?
>> Well, I very much agree that taxes are front and center. I think that the key issue is if Vice President Biden is elected, how hard he's going to push for those tax increase. So far, he's been categorical about raising the corporate tax rate to 28%, and increasing taxes for higher income earners. But how much prominence can he give that? How hard does he push it? And I really do believe that the markets will struggle to absorb higher taxes. I think that is a first order concern and something that wants to be listened to very closely.
>> All right, do you think we're going to get actually distracted by not so much of the issue of taxes in general, but specifically, by the president's taxes or rather tax returns? I mean, is that going to be a big thing, do you think?
>> Oh, I think it's going to be enormous. I think that Joe Biden sees that as an issue where he's got an advantage. And he's just going to put a lot of emphasis on President Trump releasing his taxes, on various reports that maybe Trump's tax payments have been very limited in recent years. And I think that we will hear likely a lot more about that issue regarding taxes, then what tax policy will be if Vice President Biden is elected.
>> Nathan, if President Trump was looking to make political capital out of a constructive jobs report, is he going to have to reassess that strategy in light of what we learned from Disney and these very sharp job cuts, 28,000. That's about 10% of their domestic workforce. This just highlights the disconnect between Wall Street and Main Street and also the uncertainty in the broader economy.
>> It really does. The US labor market has shown an extraordinary bounce over the last few months. And we've seen the return of roughly 11 million jobs. And that's substantial. But even so, the labor market is still in a very deep hole. And we've lost still millions and millions of jobs. And it's very hard for President Trump to say, well, you know, it would have been a lot worse if we hadn't have done X, Y and Z. Or it's hard for President Trump to say before the Coronavirus, the labor market looked great. So, it is really difficult to tell the story. And I think that this news regarding Disney very much does highlight the tension that are still out there that are influencing the jobs market and are likely to be indicative of pressures that people are feeling and pressures that will influence decisions as to how voters will cast their ballots on election day.
>> Right. There is the risk, it looks like, of another round, a second round of layoffs. Nathan, are we running out of road to get a fiscal deal through a Congress or as CNBC Ylan Mui has been reporting Secretary Mnuchin, he's expected to make a counterproposal to Nancy Pelosi's $2.2 trillion Democrat stimulus bill. Is there any kind of common ground to be expected here? And is that going to be enough to break the stalemate?
>>Well, I'm encouraged that Speaker Pelosi and Secretary Mnuchin are still talking. But at this stage, it's really hard to believe that we're going to see a deal. They've been talking and struggling with these issues for the last couple of months, and really have not made a lot of headway on it. I think that the reality is that the economy has bounced back some, and now Washington is saying we have scope to return to politics as usual. And the consensus for fiscal stimulus that existed in the spring is broadly gone. Now, I hope that we'll see some progress on it. But I'm certainly not holding my breath for any fiscal between now and Inauguration Day. If Vice President Biden is elected, I think we might see stimulus on the other side in January, after he's inaugurated, but not in the interim.
>> All right. And Nathan, at PGIM, you guys are a fixed income, a bond shop here, depending on November 3, or shortly after, hopefully, shortly after, whether it's Biden victory or a Trump victory, what happens, do you think, to the curve? At long end we're at 140.65 right now on the 10. So, it's got a slight upward slope. What happens depending on whether it's Biden or Trump?
>> So, I think the key question there, when we look to the other side of the election, is do we get a clean outcome? Or do we go through an extended period of a disputed election? And I think if it's not clear who's won, you're going to see various kinds of term premiums rise. I think that that is going to be an event that leaves folks nervous about the United States and will certainly weigh heavily on the US dollar. On the other hand, if we have a clean result, I would almost go so far to say as, you know, if Biden or if it's Trump, it's a clean result, and we know who won, that the markets are going to breathe a sigh of relief on the day after, and my guess would be that we'd see a decline in rate.
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