Pro Perspectives 10/25/22

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October 25, 2022

As we discussed yesterday, the biggest event for markets, by far, over the next two weeks, is the midterm election (bigger than earnings, bigger than the Fed rate decision).

With that, just a month ago, here in my daily note, we took a look at the election betting markets. The oddsmakers were pricing in about a 47% chance of a split Congress, and 33% chance of a Republican sweep.

Here's what it looks like now …

As you can see, the bets on a Republican sweep have ramped up since mid (late) September.

What was happening at that time? Markets were melting.

If we could attribute a market timeline to this change in the midterm election outlook, it would start with a hot U.S. inflation number, then a warning on "worldwide recession" from FedEx, then a draconian message from the Fed on the rate path, then an attack on the Russia gas pipeline, then the meltdown in the UK bond market (a threat to global market stability), and then another hot U.S. inflation number. Meanwhile, throughout this timeline, mortgage rates jumped from 6% to 7%.

So, was it this destabilizing spiral, over the period of less than 30 days, that may outright flip control of Congress? Maybe.

If so, the Republican Congress would likely go after (i.e. attempt to weaken) the Build Back Better funding (better known as the "Inflation Reduction Act")?

That would be a catalyst to get yields moving back down.

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