Will Lower Inflation Make The Biden Economy Look Better For Harris Heading Into Final Two Election Months?

Inflation numbers came in a tad better than expected on Wednesday. Will this be enough to get Main Street to believe the Biden economy wasn’t so bad? And if so, does that give Kamala Harris a new edge over Donald Trump heading into the two months of the campaign?

First, market expectations were for rolling 12-month inflation to come in at 2.6%. It came in at 2.5%.      

But is falling inflation good for Harris? Or a sign that the economy is running on fumes?

“Unlikely it's good for Harris because the root of the dissatisfaction is that wage gains lagged price increases over Biden’s term,” said Brian McCarthy, Managing Principal of Massachusetts-based investment consulting firm Macrolens.

“Real wages remain well below where they would be if the pre-pandemic trend remained intact. Inflation will stabilize but prices are still higher and household budgets are still stretched,” McCarthy said.

Post-debate polls by CNN show that most people still prefer Trump on economic matters over Harris. The poll showed that 55% of voters said Trump would handle the economy better than Harris, while 35% said Harris was a better pick.

Although the Real Clear Politics polling average shows Harris with a slight lead (1.1%) just before the debate, a debate many say she won, betting markets swung away from Trump after the debate and have her a slight favorite at 51%. The Invesco Nasdaq QQQ ETF and SPDR S&P 500 SPY were both up the day after. Only the Dow was down slightly. The market will be more election-driven in about a month.

“The year-over-year CPI comfortably beat forecasts, confirming that the post-Covid inflation surge is in the rearview mirror,” said Naeem Aslam, a consultant with London-based brokerage, AvaTrade. “This should have been a golden moment for gold traders, with the Fed’s target of 2% almost in sight and next week's rate cuts now a sure thing. But market reactions are telling me a different story. Traders are scaling back their expectations for a 50 basis points rate cut. They were hoping for a number significantly better than 2.5% to justify a bigger reduction in interest rates.”

Gold prices are stalling, looking for direction. That’s a Fed issue, not a Harris or Trump issue. Investors in the SPDR Gold GLD ETF have little to complain about anyway. That fund has been on a tear all year long and gold hit all time highs this week.

“Regarding inflation and who will benefit most from it falling – Harris or Trump -- I think the answer is unclear for now,” Aslam said. “But from where I sit in London, it seems to me that many individuals, particularly corporate executives, have contributed millions of dollars to Harris’s campaign; a lot of corporate America prefer her over Trump.”

Trump has promised to keep the Tax Cuts and Jobs Act, while Harris has talked about raising corporate taxes and Federal income taxes for high-net-worth individuals and higher capital gains taxes for the wealthy. Trump has also said he wants to have a 10% baseline tariff for all countries that do not have a free trade agreement with the U.S. to entice more investment in industry at home. Harris called it a “sales tax on the middle class”, which is odd considering that on May 14 the Biden administration opted to extend the Trump-era Section 301 tariffs on China.

Prices Still High, Unemployment Cooling. Economy May Have Peaked

Most investors are giving up on the 50 basis points cut and assuming the 25 basis points from the Fed next Wednesday.  Labor markets will have to get worse for steeper cuts, though the Fed is likely to be in easing mode from now until December.

“Our base case remains for the Fed to deliver three 25-point rate cuts through year-end,” said Andy Schneider, Senior Economist at BNP Paribas Securities in New York. “We think the bar to quicken the pace of cuts remains low and conditioned on labor market deterioration.”

In cryptocurrency markets, Bitcoin USD investors will be dependent on dollar strength for the time being. BTC is down from its highs on the year and may have peaked.

“If the dollar gathers steam because traders are betting that the Fed won't lean too dovish, Bitcoin faces a critical moment,” said Aslam. “Bitcoin’s protective hedge truly shines only over the long term. In the short term, a strong dollar puts pressure on Bitcoin’s momentum so I think the price is likely to consolidate between the $50,000 to $60,000 Bitcoin price range,” he said.

The collapse in energy prices will lower gasoline prices and give Harris a chance to say all is coming along fine; we are out of the Covid woods now completely. But it’s also a sign of falling demand and a deteriorating economy.

Look for the stock market to be vulnerable to further declines with no supportive rhetoric from either the Fed or the Biden administration to stabilize it. Economic releases between now and September 18 could contribute to the slide.

Inflation is coming down because the economy is cooling. And with prices still way high from where they were three years ago – especially services like internet and insurance – Wednesday’s CPI drop signals an economy in the throes of tapping out.

“You are still looking at a budding unemployment problem,” said McCarthy. “Harris or Trump, the next one up will be coming into the White House against a sour economic backdrop.”  

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.