The Great Debate

By Philip Marey, Senior US Strategist at Rabobank

The US dollar continued to strengthen and EUR/USD briefly dropped below 1.0670 yesterday as the Fed and the ECB have been trading places in the cutting cycle. Bloomberg reported that the ECB will start the next strategy review after summer; expected to be completed by 2025H2. Our ECB watcher Bas van Geffen provided the following comments. Recall that the previous one was in 2021, when the ECB decided, amongst other things, to change the exact definition of its price stability target to 2% symmetrically, and set some climate goals. The agenda for the next strategy review is unclear yet, but I would not expect big updates this time. First of all, the price stability target has recently been reviewed, and so has the toolkit. Secondly, the time between reviews is much shorter than it was with the 2021 update. In fact, more regular reviews were also part of the previous conclusion. One element of policymaking that has been under discussion is the economic projections. Perhaps the ECB will update the way it communicates these. Options are the presentation of scenarios via e.g. fan charts (like the Riksbank produces) or a Fed-style dot plot. But especially the latter is not uncontested.

US new home sales are very volatile, but the 11.3% drop in May reported yesterday was the largest since September 2022. High mortgage rates and high house prices are holding back purchases, despite the rising supply of available homes.

The results of the Fed’s annual bank stress test showed that while large banks would endure greater losses than last year’s test, they are well positioned to weather a severe recession and stay above minimum capital requirements. Vice Chair for Supervision Michael Barr said: “While the severity of this year’s stress test is similar to last year’s, the test resulted in higher losses because bank balance sheets are somewhat riskier and expenses are higher.” This year’s hypothetical scenario is broadly comparable to last year’s scenario. It includes a severe global recession with a 40 percent decline in commercial real estate prices, a substantial increase in office vacancies, and a 36 percent decline in house prices. The unemployment rate rises nearly 6.5 percentage points to a peak of 10 percent, and economic output declines commensurately. However, as we explained in The commercial real estate-small bank nexus, most commercial real estate loans have been made by smaller regional banks that are not included in the Fed’s stress test.

In the UK, the BBC hosted the final debate between Conservative Prime Minister Rishi Sunak and Labour leader Keith Starmer before the July 4 election. Essentially, both claimed that the other person and party were not credible. Sunak accused Starmer of not being straight with the country on migration, taxes and women’s rights. Starmer responded that Sunak was too rich to understand the concerns of ordinary people. The YouGov poll showed the debate had been a draw in the eyes of the British voters. One questioner from the audience said: “Are you two really the best we’ve got to be the next prime minister of our great country?”

The Day Ahead

Tonight the first of two debates between current President Biden and former President Trump is going to take place in Atlanta. The debate will be televised by CNN at 21:00 ET (Thursday evening), which means 3:00 CET (Friday early morning). With Jake Tapper and Dana Bash moderating the debate, and CNN hosting it, it will be a home match for Biden. There will be no studio audience, which is favorable to Biden, because it will make it easier for him to keep his focus. Also, the microphones will be muted except for the candidate whose turn it is to speak. However, there will be no pre-written notes or other props to help him remember. While there will be two commercial breaks, campaign staff may not interact with their candidate during that time. The debate will last 90 minutes. Biden will go first at the conclusion of the debate and Trump will deliver the last closing statement.

The fact that the first debate is taking place so early in the year – they normally start in September or early October – shows that the Democrats are desperate to turn around the election dynamics. Since September 2023, Trump has been leading in the polls, and his legal conviction in the Stormy Daniels case only slightly dented his prospects as we discussed in Elections, tariffs and lawfare.

So Biden is playing at home, but he needs to go on the offensive. If Trump plays it cool and compares their records on the economy, the border and overseas wars, he could very well counteract the attacks on his character and his actions on January 6, 2021. The downside could be larger for Biden, if doubts about his age are reinforced by this debate. It would be more difficult to recover from than Trump going off script and digging a hole for himself.

The debate will be attended by his intended VP pick, Trump said over the weekend. However, it remains uncertain when Trump will reveal his choice to the public. Given the age of both candidates, vice-presidents matter this time. According to PredictIt, Doug Burgum is now the most likely candidate. He is followed at some distance by Vivek Ramaswamy and J.D. Vance. At an even further distance, completing the Top 10, in order of decreasing probability, we have Glenn Youngkin, Marco Rubio, Ben Carson, Tim Scott, Byron Donalds, Elise Stefanik and Tulsi Gabbard. For Trump, the VP is especially important to widen his net and attract moderate Republicans and swing voters. Picking a wannabe Trump would not help him get elected.

There is a second debate scheduled on September 10. Is this first debate going to be a game changer? Note that we still have a Trump victory in our baseline forecast. Given the asymmetric risks we mentioned, a poor performance by Trump would not necessarily invalidate our current baseline. In contrast, a poor performance by Biden would solidify it.