The U.S. presidential election has not been the swift victory anticipated for Democratic candidate Joe Biden as the race remains tight at the end of Wednesday. Biden has a path to victory with the trend in Pennsylvania indicating he will take the state and its 20 electoral votes.  Biden may even pull out a close win in Georgia as the counting of the final ballots in the Atlanta area are overwhelmingly in his favor. It is not yet certain but it appears likely that Biden will be the next president in a very divided country and government. So far, the Democrats have not been able to retake the Senate and the path to that outcome looks narrow, hinging on the possibility that Georgia will have runoff elections for both Senate seats.

Both stocks and bonds are rallying at the prospect of divided government; the S&P500 rebounded to 3443, just shy of the October 23 level, while the 10-year Treasury rate has slipped to 0.742%, down from a high of 0.916% on Tuesday. The logic here appears to be that divided government under a “normal” president will deliver more consistent economic policies at the executive level but will lack the ability to legislate large changes in tax and spending policy and produce a smaller Covid-19 support package. Steady albeit slower growth than optimal with less issuance of debt and longer zero rate policy from the Fed. We will see.

The ISM manufacturing data was solid with the employment component edging above 50:

The ISM services data however indicated some softening in employment:

This was consistent with the ISH/Markit report which although showed the strongest growth in services since April 2015, said this about employment:

Meanwhile, greater new order inflows encouraged companies to increase their workforce numbers in October. Employment growth nevertheless softened to a three-month low amid some reports of fewer requirements due to excess capacity.

Signs of softer job growth were consistent with the ADP report and its private payroll gain of 365k, much weaker than expectations of 643k. This bodes poorly with for 700k private gain expected for the upcoming employment report for October although the ADP report has been known to be a volatile predicter of the actual jobs numbers.

The Fed concludes its meeting Thursday. No policy change is expected as the Fed appears to lack consensus on next steps. I doubt they want to make news this week anyways. Federal Reserve Chair Jerome Powell will continue to sound the alarm on rising Covid cases and the importance of fiscal policy. He might show relief that the data remains firm so far but won’t want to say anything that gives the impression the Fed will hike rates sooner than anticipated.

Bottom Line: The election is still up in the air, the U.S. economy is still expanding although look for the expansion to settle into a subpar pace of job growth until the pandemic is contained, and the Fed remains committed to holding rates near zero until something interesting happens with inflation.