Is the disappointment trade setting up?

September 30, 2020 • Estimated Reading Time: 4 minutes

Equities are picking up steam today, overnight losses have been recovered, and the major indices sit healthily in the green.

Everything's wonderful.

But...  

How much of this recent positivity is riding the wave of stimulus optimism?

Yesterday, the Democrats put forward their bill (detailed in the opening Belle here);

Today, we get some colour on the compromise.

Bloomberg report;

U.S. Treasury Secretary Steven Mnuchin said he sees “one more serious try” at securing a deal with Congress on another fiscal stimulus package and suggested he’ll offer Democrats a proposal for roughly $1.5 trillion in pandemic relief.

Mnuchin said Wednesday on CNBC that the administration’s counter-offer to House Speaker Nancy Pelosi is similar to a plan put forward by a bipartisan group of House members -- which included an escalation in spending up to $2 trillion if the coronavirus pandemic persists. That’s still short of a $2.2 trillion relief package that Democrats unveiled Monday and are preparing to bring to a House vote.

Mnuchin said he hopes to have an “understanding” worked out by Thursday.

Pelosi has asked Democrats to deliver a “strong vote” for the party’s latest package, which is smaller than the $3.4 trillion they passed in May but rejected by Republicans. In a letter to colleagues, she described it a “proffer” in talks. House Majority Leader Steny Hoyer told fellow Democrats Wednesday his intention is to send the bill to the floor Wednesday or Thursday if there is no deal with Mnuchin.

The meeting is on...

 đźš¨đźš¨NEW … @stevenmnuchin1 is coming to the Capitol to meet with @SpeakerPelosi at 12:45 today to present the administration’s Covid relief counter proposal.— Jake Sherman (@JakeSherman) September 30, 2020 

This is about as close to an agreement as the two sides have been.

Key differences remain however.

White House economic adviser Larry Kudlow, speaking on CNBC Tuesday morning, said the true cost of the Democrats’ bill is closer to $2.6 trillion and about one-third of it is related to subjects that Republicans don’t believe are strictly tied to the pandemic.

The idea of an 'escalator clause' could make a deal more palatable for Democrats, but will it be enough to gain the Republican vote?

For all the chatter, much doubt remains;

 Seasoned Hill aide texted me this, describing the feeling of many on Cap Hill: “Jake. Why are folks feeling optimistic for a deal? I mean both sides.”

Stay tuned!— Jake Sherman (@JakeSherman) September 30, 2020 

 She also indicated on MSNBC that the real estate tax breaks also still still a problem....— Erik Wasson (@elwasson) September 30, 2020 

The two sides are showing willing to get a deal over the line.

Is it genuine or simply 'keeping up appearances'?

Either way, we should have a solid resolution within the next day or two.

If there is a deal, we should see the classic risk on trade pushing equities higher.

If there is no pre-election stimulus then risk markets should take a knock.

No stimulus deal AND poor employment data (initial and continuing claims are released tomorrow, NFP's are released on Friday), then we could see a larger selloff.

Something to keep a very close eye on.