Below is perhaps the most powerful chart we’ve seen showing that the markets are afraid of Mitt Romney.
It shows inflation expectations – a great proxy for risk – and it looks like the market expects more inflation (supportive of risk assets like stocks) if Barack Obama is re-elected as president than if Mitt Romney were to win the election.
The idea that Romney would be bad for markets has been in ascendance in the past few weeks – and at a big investor conference this week, the concept was all the rage.
The thinking goes that Romney would want to put a someone with more hawkish – or conservative – views on monetary policy in the chairman position at the Federal Reserve.
Doing so, the market seems to fear, would be bad for risk assets because of the prospect that the “Bernanke put” would be removed, and the risk that the Fed lets markets fall without providing more stimulus would rise.
With that in mind, the chart below, via Société Générale rates strategist Fidelio Tata, shows the correlation between Obama’s re-election odds on Intrade and the market’s inflation expectations:
Tata comments on the correlation in a note to clients today:
One striking difference between candidates Obama and Romney, as far as monetary policy is concerned, involves finding a replacement for Fed president Bernanke. The current term expires on 31 January 2014 and it is widely understood that the incumbent will not seek an additional one.
Mr Obama is believed to gravitate towards dovish candidates for the Fed presidency, such as Janet Yellen, Bill Dudley or Don Kohn, while Mr Romney, says some of the press, prefers economists more critical of “printing” money, such as John Taylor, Glenn Hubbard or Martin Feldstein.
Thus, the outcome of the US presidential election may have an indirect, yet significant, impact on US monetary policy in the years to come. One could argue that an Obama administration would be more inflationary than a Romney administration. Market expectations appear to support this view.
10-year inflation breakevens have not pulled back as much as the recent decline in Mr Obama’s popularity would suggest. Obama’s lead is still too significant to bet on a hawkish Fed policy in a Romney victory, but if Obama’s popularity were to increase further, a decline in inflation breakeven rates should not be ruled out, in our view.
It’s worth noting that the market’s expectation for inflation conflicts with consumers’ expectations for inflation. According to the University of Michigan Consumer Confidence report, consumer inflation expectations have just hit a three year low.
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