The House of Representatives vs. the Senate: Which one has more impact on U.S. stocks? | U.S. midterm elections and U.S. stocks (Episode ②)
First, let’s clarify the transmission mechanism: elections change expectations for fiscal and trade policies, which affects inflation, government borrowing, and the yield on the 10-year U.S. Treasury—ultimately influencing the valuation of technology stocks.
Will a divided government limit fiscal expansion, or will it lead to a situation where spending is hard to curb, deficits are hard to reduce, and policy conflicts become more frequent?
Taxation and appropriations both require approval from both chambers. Either chamber can block major legislation. The Senate is also responsible for confirming key personnel nominations.
Path 1: New fiscal stimulus is constrained, and yields may fall.
The Republican Party will roll out new tax cuts or spending plans. If the Democrats win the House of Representatives, the likelihood of these plans being passed could decrease.
That would mean easing pressure on future demand, growth, and inflation, and government borrowing could be lower than previously expected. As a result, the market may downgrade the future interest-rate path, supporting 10-year Treasury prices and lowering yields.
Path 2: Both sides compromise by increasing spending, so the deficit may not fall.
As of Sept. 3, UBS CIO gave scenario probabilities: Republicans keep both chambers 10%; Democrats win the House while Republicans keep the Senate 50%; Democrats win both chambers 40%.
Under a divided Congress, both sides may reach an agreement to boost defense spending and delay cuts to social programs.
In the scenario where Democrats control both chambers, higher taxes may still face resistance from the president. The eventual compromise could bring a wider deficit and less fiscal tightening.
Spending cuts are postponed, while revenues don’t increase accordingly. That means future deficits and borrowing needs could be higher than expected, increasing pressure on the supply of longer-dated Treasuries.
If economic demand remains strong, a relatively looser fiscal stance could also make inflation harder to bring down, reducing market expectations for rate cuts.
Path 3: Fiscal conflict raises the compensation investors require to hold long-term Treasuries.
On Aug. 18, Charles Schwab said that if the Senate also flips, personnel confirmations would face even more resistance.
For long-term government bonds, policy reversals may lead investors to demand more compensation, which is known as the term premium.
The 10-year nominal yield can be broken down into the real yield and inflation compensation. The latter is usually measured by Breakeven, which includes inflation expectations and is also influenced by the risk premium and liquidity.
First, let’s clarify the transmission mechanism: elections change expectations for fiscal and trade policies, which affects inflation, government borrowing, and the yield on the 10-year U.S. Treasury—ultimately influencing the valuation of technology stocks.
Will a divided government limit fiscal expansion, or will it lead to a situation where spending is hard to curb, deficits are hard to reduce, and policy conflicts become more frequent?
Taxation and appropriations both require approval from both chambers. Either chamber can block major legislation. The Senate is also responsible for confirming key personnel nominations.
Path 1: New fiscal stimulus is constrained, and yields may fall.
The Republican Party will roll out new tax cuts or spending plans. If the Democrats win the House of Representatives, the likelihood of these plans being passed could decrease.
That would mean easing pressure on future demand, growth, and inflation, and government borrowing could be lower than previously expected. As a result, the market may downgrade the future interest-rate path, supporting 10-year Treasury prices and lowering yields.
Path 2: Both sides compromise by increasing spending, so the deficit may not fall.
As of Sept. 3, UBS CIO gave scenario probabilities: Republicans keep both chambers 10%; Democrats win the House while Republicans keep the Senate 50%; Democrats win both chambers 40%.
Under a divided Congress, both sides may reach an agreement to boost defense spending and delay cuts to social programs.
In the scenario where Democrats control both chambers, higher taxes may still face resistance from the president. The eventual compromise could bring a wider deficit and less fiscal tightening.
Spending cuts are postponed, while revenues don’t increase accordingly. That means future deficits and borrowing needs could be higher than expected, increasing pressure on the supply of longer-dated Treasuries.
If economic demand remains strong, a relatively looser fiscal stance could also make inflation harder to bring down, reducing market expectations for rate cuts.
Path 3: Fiscal conflict raises the compensation investors require to hold long-term Treasuries.
On Aug. 18, Charles Schwab said that if the Senate also flips, personnel confirmations would face even more resistance.
For long-term government bonds, policy reversals may lead investors to demand more compensation, which is known as the term premium.
The 10-year nominal yield can be broken down into the real yield and inflation compensation. The latter is usually measured by Breakeven, which includes inflation expectations and is also influenced by the risk premium and liquidity.