Three things to watch as President Biden begins his second year in office

President Biden’s first year in office was transformative, but this year he faces a series of fresh challenges – with midterm elections on the horizon and slim legislative majorities on the line.

Three key things for markets to watch in early 2022

The administration faces an underwater approval rating, a fresh surge in Omicron cases, multi-decade high inflation, foreign policy challenges, and intra-party frictions which threaten his legislative agenda. The President’s plate is full ahead of November midterm elections, at which his party risks losing both of its majorities in Congress. All of this will make 2022 a critical year in DC.

With this in mind, how Biden navigates a handful of key events and themes will be crucial to watch in the first few months of this year.

  1. Owning the inflation narrative: Reversing high inflation or at the very least controlling the message around it will be key going into the November midterm elections. Recent polls suggest Americas are growing more worried about inflation (even viewing it as a greater concern than job). Biden’s approval rating on the economy (and more broadly) sits below 50%, and the President’s party historically struggles in the midterms following a Presidential win. All of these factors add urgency to the President’s need to curb inflation – or at the very least, to own the narrative around it.
  2. Reviving Build Back Better: A top priority will be to revive the Build Back Better bill, which was imperilled by a high-profile rejection of the bill from Democrat Joe Manchin. With voting rights currently the primary focus at the Senate level, we eye the State of the Union address (Late January / Early February) as a target for a revival of negotiations.
  3. Confrontation with China and Russia: The two-year anniversary of the US/China Phase I deal looms in February, The Biden administration pledged in October that it would hold China to its commitments. Meanwhile, US-Russia relations will continue to be tested amid rising tensions in Ukraine.

Fiscal stimulus: bridging internal divisions will be key in 2022

President Biden’s first year in office was punctuated by a series of legislative victories, as the administration passed two significant stimulus packages in 2021 despite an ultra-thin Senate majority. That said, 2021 ended on a sour note, as conservative Senate Democrat Joe Manchin’s high-profile rejection of the Build Back Better (BBB) social infrastructure bill threw fresh uncertainty into the package.

The ideological battle over high inflation looms over BBB. Manchin has frequently cited inflation alongside debt and deficit concerns as rationale for his rejection of the bill in its current form. Still, we don’t think the BBB bill is finished, and the odds of its revival may increase over the course of 2022 should inflation begin to moderate. We see core price inflation hovering close to 5% in mid-2022, so challenges remain. But we think BBB’s relatively long spending profile and lower direct stimulus likely implies it will be less influential on the US rates outlook than packages passed earlier in the pandemic that quickly put dollars directly into consumers’ pockets.

We loosely eye the State of the Union (late January / early February) as a time when negotiations on the package may reasonably restart. And we expect Democratic Party angst over a stalled BBB bill to ramp up significantly in spring, should it remain in limbo (after all, Democrats will need a hallmark stimulus bill to campaign on ahead of the midterm elections).

Foreign policy: greater focus in 2022

With trillions of dollars in approved spending under his belt, and the final major piece of stimulus legislation facing a significant roadblock, President Biden’s focus on foreign policy may increase. Biden began his first term as President aiming to revive America’s alliances, where he’s found some successes and faced practical challenges (repairing the country’s relationship with Europe, for example), and using those strengthened alliances as a launching point to meet its strategic competitors. We expect this will remain the overarching goal of the administration’s foreign policy.

Trade policy, meanwhile, has been much quieter under Biden vis-à-vis his predecessor. The US-China relationship remains tense but economic escalation has largely been avoided. With the two-year anniversary of the signing of the Phase I trade deal looming in February, and pledged as part of that deal, there is a risk of more active US-China trade engagement in 2022. We think the threat of rising consumer prices at a time when they’re already reaching records heights is likely to contain any escalation between the two nations.

Energy prices: an election battleground issue

Finally, energy prices are set to remain a flashpoint for the administration in 2022. Rising petrol prices is already set to be a major campaign battleground issue for November midterms, and both active (further releases from strategic reserves) or passive (OPEC pressure) efforts to rein in petrol price increases are possible in 2022.

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