We see a new interpretation of TACO – Trump Affordability Crisis Outcry – threatening the market’s benign assumptions about the November 3 US midterm elections. Investors have been comfortable with a Republican loss of the House but retention of the Senate, resulting in legislative gridlock without challenging the policy outlook. However, prediction markets are questioning this scenario. For example, Polymarket now assigns probabilities of 91% and 64% to Democratic victories in the House and Senate, respectively.
For investors, the immediate risk is a reassessment of policy support and political stability, rather than an outright reversal of US President Donald Trump’s agenda. Losing the Senate would deepen constraints on his remaining term. While losing the House would already obstruct legislation, losing both chambers would give Democrats broader control over congressional investigations and scrutiny. A Democratic Congress, however, could neither automatically reverse tax cuts nor impose sweeping new regulations, given Trump’s presidential veto.
With year-end approaching, investors sitting on gains may become less willing to carry those exposures through the midterms. Equities appear vulnerable to profit-taking, while risk-reduction could support US Treasuries despite concerns about fiscal sustainability. The USD could lose support as the US exceptionalism narrative fades, although demand for liquidity could initially cushion it.
Against this backdrop, Fed Chairman Kevin Warsh’s fireside chat with IMF Managing Director Kristina Georgieva could test whether the Fed reinforces or tempers market expectations of further tightening. The discussion is scheduled for October 16 at the Annual Meetings of the IMF and the World Bank in Bangkok, Thailand.
Georgieva praised Warsh last week for clearly signalling that price stability remains the Fed’s priority, backed by actions rather than words. Markets had attributed the DXY Index’s rally following the September 16 Fed hike to rising US Treasury yields, reflecting stronger growth and persistent inflation that required restrictive monetary policy.
However, Georgieva also warned that advanced-economy bond yields reflected rising fiscal and term premiums, underscoring the need for credible medium-term fiscal consolidation. A discussion of US fiscal sustainability and the resilience of the international monetary system could distinguish between the USD’s cyclical interest-rate support and its longer-term structural vulnerability. The Financial Times reported that US Treasury Secretary Scott Bessent will not attend this week’s IMF/World Bank meetings.
Quote of the Day
“Nobody cares how much you know, until they know how much you care.”
Theodore Roosevelt
Today in history
On October 12, 1901, Theodore Roosevelt renamed the "Executive Mansion" as "The White House".
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