Top of the Morning: Legislative roundup, Midterm elections, & America 250
The desk posits that current legislative developments in Washington, coupled with impending midterm elections, will shape market sentiment ahead of summer. Per the full note from UBS, there is significant focus on Congress's ability to advance its agenda before the summer break definitive for investor outlook. Key legislative outcomes can impact fiscal policy, which is fundamental to economic performance and currency strength. The desk notes that the midterm elections could significantly influence market dynamics depending on the resulting alignment of power in Congress.
What the desk is arguing
The desk argues that the legislative outlook from Congress will be a critical factor influencing market behavior as the summer recess approaches. Insights from UBS indicate that managing legislative priorities effectively could sway market confidence and create ripples across sectors, impacting asset valuations.
Supporting this perspective, the discussions on potential legislative accomplishments highlight areas where bipartisan support might be achievable, including infrastructure spending and budget negotiations. These initiatives can bolster economic outlook, potentially strengthening USD as market participants anticipate favorable outcomes.
While positive legislative news could support a stronger dollar, the alternative read would emphasize the risk of legislative gridlock; failure to achieve any significant milestones could undermine market sentiment and weaken USD positioning in the near term.
01Legislative outcomes in Congress are critical for market sentiment.
02Midterm elections pose a significant risk or opportunity for fiscal policy direction.
03Bipartisan cooperation may enhance economic outlook and USD strength.
Market implications
Traders should watch for indications of legislative progress or hurdles that might impact USD valuation, particularly surrounding infrastructure and budget discussions. By monitoring the legislative calendar and midterm election polls, traders can gauge the potential volatility in USD positioning leading into summer.
Risks to this view
Key risks to this view include an unexpected impasse in legislative negotiations that brings uncertainty to fiscal policy or political fallout from the midterm elections that may alter the balance of power in Congress, adversely impacting market confidence and currency strength.
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Hi everyone, Dan Cassidy here. Welcome back to Top of the Morning here on the UBS Market Moves podcast channel. I am joined today once again by Kurt Reiman, Head of Fixed Income Americas from the UBS Chief Investment Office, as well as Shane Lieberman, Senior Governmental Affairs Advisor from Governmental Affairs U.S. here at UBS.
And today we will focus in on some timely topics as it relates to Washington, Congress, we'll speak a bit about the upcoming U.S. midterm elections in November, and of course reflect on the 250th anniversary of independence for the United States of America, which was celebrated this past weekend on July 4th. So a bunch of topics we want to cover with you, our listeners, on today's episode. Before we get into those topics, Kurt, Shane, want to first thank you both for dropping by on this Tuesday morning.
Great to be with you both as always. Thank you for joining us. Good morning, Dan.
Good morning, Shane. Good morning, everyone. Thank you for having us, Dan.
Absolutely. So let's dive right into it, Shane, knowing that Congress is quickly approaching the summer recess period. There is, of course, no shortage of agenda items to address, and we know as well that there are also disagreements amongst lawmakers at the moment and those with the Trump administration.
So I'm curious what realistically can be achieved by Congress between now and the beginning of that recess period, and what may need to be revisited, if at all possible, when Congress returns. Yeah, I think it's important to take a moment to set the table and recognize that this is a brief work period up and coming. The House is actually only scheduled to be in eight days between now and August, while the Senate is scheduled to be in 20 days between now and, I think, the second week of August.
So there is a limited bandwidth for them to actually work. But they do have a busy schedule and heavy agenda in front of them, and I don't think they'll be able to address all those issues. I would say the first thing I would mention is that bipartisan housing bill has passed both the House and Senate.
It's been presented to President Trump, where he has said he's not signing it until Congress passes the Save America Act, which is that voter integrity bill, right? So the reality is that that does not have enough support in Congress to probably make it to his desk. So what happens to the housing bill?
Well, as you may remember from middle school civics is that if the president does not sign the bill for 10 days, not including Sundays, and the Congress is in session, then the bill automatically becomes law. If the Congress is out of session, then it's known as a pocket veto where it's vetoed. So I think Congress is intending to be in session so that the bill does become law.
After that, I mentioned the Save America Act, which there'll be continued discussions about, and it's also hampering the House's work right now because there are a number of House lawmakers that are with President Trump in solidarity on this issue and grinding to halt any other legislative activity. So the House may not get to much else this summer, but they are working on a defense authorization bill, which they hope to dispense with very quickly. The Senate will take a little bit longer on that, and I would expect this to become law near the end of the year.
And keep in mind, the defense authorization bill has been a bipartisan bill for over 60 years now. After that, there are a number of things. Probably the most important to Congress right now is the 12 separate appropriations bills that fund all of federal government.
The House has been working on these and has passed all 12 through committee and has begun processing them before the full House. The Senate has not nearly gotten that far and will be continuing negotiations mostly behind the scenes on trying to advance those bills so that they may be in position to pass some of them before the end of September. I remember October 1st is what the start of the new fiscal year.
So there's going to be a lot of time spent on those appropriations bills. Additionally, there are behind-the-scenes discussions about this crypto market structure bill. I'm not optimistic about this.
Conversations have not advanced enough to lead to a breakthrough on this issue. So I'm a little bit pessimistic on that being finished off before August. Additionally, the Senate will continue to process nominations.
And then if you look on the horizon right after August, you have a due date, as I mentioned, for these government funding bills. But you also have a due date for the highway authorization, the farm bill. So the House and Senate will spend some time on that and see if they can come to a resolution, which I don't think they'll be able to.
So I imagine when they come back in September, they'll do some kind of short-term punt on those issues. As you can see, very busy agenda, but the time will not allow for all of this to be completed. So Shane, that was a very helpful assessment of what is outstanding, what needs to be accomplished.
And there is, of course, a lot out there. Kurt, from CIO's vantage point, any thoughts on market implications of any legislative uncertainty at the moment? No, I don't think that that's going to be really in the market's radar.
It's more a question of, you know, which way does the Federal Reserve tilt its preference for either staying on hold or hiking the direction of the macro data earnings. That's more likely to be the focal point. I would add maybe to Shane's very comprehensive overview of Congress, maybe just to shift back to the administration, something that could be important just to keep our eyes on, but the, you know, the 150-day window for these 10 percent tariffs, that will expire.
And so we'll have to just watch to see what the administration's next steps are. It's very likely that they'll move and are preparing to move in the direction of these either sectoral or country-specific tariffs under Section 232 or Section 301. But exactly how that plays out, the tariff rates, the exemptions, still very unclear.
But that is something to have on your radar screen over the course of the summer. OK, so a lot to watch out for from the executive and legislative branches of government. And we'll, of course, continue to monitor these topics and keep our listeners informed.
As we're speaking here in early July at this point, just roughly four months out from the midterm elections, quickly approaching in November. Shane, how are both sides of the aisle pitching the American voter at the moment? What might messaging or policy view stances consist of?
And what does the likely outcome scenario for the composition of Congress look like today? Yeah, great question. I think, you know, first off, you always see parties testing messages.
So the message may change as they, if in case they find something that's more impactful and resonates more with voters. So that's the first thing to keep in mind. After that, you're definitely going to see Democrats, you know, be the anti-Trump.
One of the most important things in these elections is getting people out to vote. And you need to make them enthusiastic about that. So at the very base level for Democrats to turn out their base, they have to be anti-Democrat.
However, the second step of that is you have to offer something more than just being against the president. Right. I think a lot of Democrats talk about affordability, whether it be for, you know, gas at the pump or health care or groceries.
I think you're going to hear them, Democrats, talk about those issues a lot and try and say that, you know, Trump and Republicans have made it more costly for you. They're not doing anything on affordability. And I think that will resonate with a number of, you know, independent voters that probably will propel Democrats to take over the House.
But, you know, obviously, four months out, this could all change. Republicans will definitely be trying to remind voters that, you know, they cut taxes and trying to help them with that affordability question. Right.
They'll try to be constantly reminding voters that, you know, they cut taxes on overtime and tipped wages and providing a child care tax credit, etc. The tough part is, is that, you know, that happened last year and we're already through a tax season and it may not fully register to many of those voters and they may not be as cognizant. So with that, you may have seen yesterday, actually, Treasury Secretary Besant joined President Trump at the White House to open up the stock exchange.
This was part of the rollout for Trump accounts. And I think they're going to press for Trump accounts really hard and talk about them continuously between now and the election. And these are the accounts for underage Americans, their savings accounts that can be used for a variety of things, you know, whether it be eventually when they grow up to open a business or other expenses.
And some of those accounts for specific Americans will get a government seed of about a thousand dollars. Right. And you see Treasury Secretary Besant working with companies to try and get them to make a match for the children of their employees.
So you'll see a lot of talk about that. Now, going back to your base question, though, of, you know, who's going to win? I already said that I think Democrats will win the House.
But keep in mind, this is getting probably still be close. You know, there's over 185 House seats that Republicans will automatically win. And then for the Democrats, it's roughly the same.
So it's really coming down to just a few dozen races. And within those few dozen, it's probably going to come down to about 18 races that are considered the most competitive. And if you look at them, Republicans are guarding on defense more than they are on offense.
So they have to run a perfect election to probably maintain the House. And that's just so hard to do with, you know, historical wins in your face of the party in power in the White House, usually losing seats. Right.
So, you know, it's shaping up to be Democrats taking over the House. But the Senate is probably going to be a little bit more interesting because, you know, if Democrats can win that, it gives them a much stronger hand against President Trump in his final two years. And I think you see Senate Republicans talking about them being the firewall.
So they're trying their hardest to maintain a majority. And, you know, start off with today, it's 53 to 47 Republicans favors. You know, there are a few seats that are true toss ups, like Alaska, Maine, Michigan and Ohio.
And then you have a couple other seats that are are going to be close. But, you know, Republicans may be favored of note, Iowa and Texas here. And then on the other side, Democrats are favored with it in Georgia and New Hampshire.
I think most Republicans, you know, behind the scenes would concede that they're likely to lose North Carolina. So that right there, you know, chips into their 53, 47 to make it 52 to 48. And then the question is, where can Democrats pick up three other states to take the majority?
I think the news that we're seeing out of Maine is troubling for Democrats. I think when you kind of do the math, they need Maine to take the majority of the Senate. Now, it's not over.
I think in the coming days, we will probably see Graham Plattner bow out of the race. And we have to see who the new Democrat candidate will be and if that person can enthuse the base enough to win that seat. You know, as of today, I'll give Republicans a slight edge.
But, you know, four months to go, Dan, and a lot can happen. Voters will have a lot to digest over this four month period for sure. Kurt, from CIO's vantage point, how is CIO thinking about the midterm elections four months out and might a certain outcome pose any notable market implications?
Right. So the odds of a Democratic sweep are, you know, we put them at about 35 percent in May when we published our election watch piece. That compares to polymarket odds, which are a bit higher.
But our view on a Republican sweep, so just maintaining that united government, is around 15 percent. And that's consistent with polymarket. So there's a little bit of a difference in our views versus some of the, you know, expectations markets.
And it's mostly around that we have a higher probability of divided Congress where the House flips to Democrats. But I think that there's a part of what Shane was describing that I think really matters. I mean, it's not just divided government where you have potentially one chamber, the Senate, in Republican control.
It's a hard path for Democrats. Not impossible, but it's a hard path, as you described. And then the other, the House being controlled by Democrats, also not a given, but it's looking to track in that direction.
But let's say we even get, you know, that outcome. Well, with Democrats still doing some soul searching about where the real power base lies within the party based on some of these primaries, whether, you know, is it promoting more establishment or progressive priorities, this is going to have implications for policy because it's not clear where there's going to be agreement. That's going to take a while to surface.
It's going to make larger legislative initiatives more difficult. You know, the party is just not monolithic and it may have a difficult time finding where the majority lies. It's not just a soul searching process.
It's also, you know, it'll surface in the votes that legislators take. So that, I think, has implications for policy. It does mean that we're unlikely to see, you know, big legislative outcomes coming from Congress after the midterms, if that's the composition that emerges.
So unlike, you know, this year where we had a tax cut bill arrive in sort of real economic terms when there were tariff headwinds and oil price headwinds, and that's kind of helped the consumer get through this because taxes have been lower and there's been refund checks going out the door, it's not so clear that in 27 and 28 that there will be that kind of support. And, oh, by the way, on top of that, the spending cuts kick in. So if the goal is to delay some of those spending cuts, then there has to be some kind of agreement between Republicans and Democrats because there's still that, you know, there's still that difficult threshold in the Senate of 60 votes to pass legislation to move things out.
So those delays to some of the spending priorities could be difficult to emerge. So anyway, that's kind of what I would say from a markets and a CIO perspective is that Congress is less likely to deliver, you know, big fiscal policy wins. The debt level as a shared GDP is already high.
It's not clear that there's going to be a, you know, a large enough consensus to emerge that would support a big fiscal policy package. And it could be difficult to get to a point where, you know, the spending cuts, which is a contraction for fiscal policy, whether those could be successfully delayed. So something to be on the lookout for.
Well, very helpful insights, Kurt, and the conversation will indeed continue as we make our way closer and closer to November. Before we close out for today, Kurt, I know this past weekend on Saturday, July 4th, the United States of America celebrated its 250th year of independence, an incredible milestone. I know you and many of your colleagues, Kurt, have done tremendous work on developing and producing the 250 years of innovation series from the chief investment office.
Many of those conversations had right here on top of the morning over the past 10 months or so, though, for our listeners who may not be as familiar, Kurt, with the series, how has CIO connected past innovations or breakthroughs to investment themes of today? We started this series back in October. We published the first one 250 days ahead of the 250th birthday.
And it was on the Transcontinental Railroad. We saw innovations and really studied the innovations all the way through electrification, aviation, the assembly line, the microchip, the internet, the smartphone, recombinant DNA, credit cards, and capital markets. So really comprehensive look at transformative U.S. innovation.
And we just published the last in the series. Later this week, we're going to publish a concluding thoughts that kind of takes it and puts it all together. It's a time-honored legacy.
That's how we view innovation in the U.S. We go all in. It's distinctive.
It's perhaps even uniquely American. And as we've embarked on this study of U.S. innovation, there are some themes that are relevant to the intersection of public policy, the economy, and financial markets today. One that stands out is fear exists almost always.
So it's there at the dawn of most new technologies. People thought their organs would liquefy if they traveled faster than 30 miles an hour on a train. There was a natural fear of flying.
Fraud almost upended the credit card industry in its infancy. There was the battle of the currents with electrification, which stoked people's fears about being electrocuted as part of these promotional efforts that favored a competing technology. Fear is all around at every step of new innovation.
And that's true today with fears about AI and automation. This is nothing new. And perhaps AI will create new and unprecedented threats.
But as we saw with recombinant DNA, there are steps that researchers and industry can take to protect the public interest and the public good. And when government gets involved, it's proven to be helpful at shaping safety and dependability. You just look back at procurement and early investing, as we saw with airplanes during the World Wars and with railroads following the U.S.
Civil War. Another theme that stands out is how new technologies are incrementally improving and advancing so that they can deliver the scale that they need to achieve wide and wholesale mass adoption. Think about airplanes and semiconductors, even pharmaceuticals.
These were all beneficiaries of either legislation or government research and development or government procurement before the commercial application was ready for primetime. And so think about biotech. There was sustained NIH funding that supported basic research.
There was legislation in the 1980s that allowed universities to commercialize federally funded discoveries. And then the third theme that I think emerges in this intersection of policy and the economy is where we see many examples of how regulation of new industries becomes essential to their long-term functioning. The Civil Aeronautics Act of 1938 and then later the Federal Aviation Administration was established to ensure the safety and operational framework that allowed aviation to scale.
In financial services, we had the Truth in Lending Act of 1968 and the Credit Card Accountability Responsibility and Disclosure Act, the Card Act of 2009, that influenced how the credit card systems developed and competed. So the question today I think is whether we're going to have the same system-wide support for the AI buildout and other related technologies as we did with past transformational innovations that we studied. There are voter concerns about risk to employment and public safety.
These have already prompted lawmakers on both sides of the aisle to introduce AI legislation. There's even a growing backlash against data centers that we've seen at the state level, the local level, and to AI more broadly. It's being adopted, this technology, and it's advancing more rapidly than any prior technology.
So this could be a potent midterm election issue already just a few years in and quite likely one that's on the ballot in 2028. So I just think that's really important as a backdrop to think about whether the policy landscape moves from one that's broadly supportive of AI and the opportunity set that it provides or one that restricts its development related to the fears of the risks that may evolve. So definitely one that bears watching, and it's something that I think we're already going to see emerge over the next four months on the local, state, and federal level.
Well, the 250 years of U.S. innovation series, very comprehensive, very fascinating, and to you, our listeners, would of course encourage you to give the series a look. The publications can now be located up on UBS.com slash CIO for your reference. Shane, before we close out, as you sit there in Washington, D.C., any reflections or takeaways from the celebrations over the weekend?
I mean, it was pretty incredible. I love fireworks, and that was probably one of the most amazing fireworks displays that anyone will ever see. There are just so many cool things going on in D.C., you know, with the 250-year celebration with the Great American Fair and exhibits in like Union Station, anywhere you go.
So it's just a great time to be in D.C. While it is really hot, it's still great to be here. I'm personally excited to go see, they just opened up under the Lincoln Memorial, kind of what, I don't want to describe it as the basement, but the underpinnings that have been there, they just didn't open them up until now.
So I'm very excited to go see that underneath catacomb-like area under the Lincoln Memorial. But there's so much to see here, anyone would have a great time visiting. Yeah, it sounds like there's a lot there to immerse yourself in, and the fireworks, of course, also a tremendous highlight.
So Shane, Kurt, very productive, comprehensive discussion today. Thank you both for joining us here on Top of the Morning to keep our listeners informed on these topics as it relates to legislation and, of course, the upcoming midterm elections, and do look forward to continuing the conversation with you both again soon. Thanks, Dan.
Thank you, Dan. Thanks, Shane. And before we close out, just want to highlight a couple of landing spots to learn more about the research and insights produced by both Governmental Affairs U.S. and the UBS Chief Investment Office.
And again, we've been joined today by Kurt Reiman, Head of Fixed Income Americas from the UBS Chief Investment Office, as well as Shane Lieberman, Senior Governmental Affairs Advisor from Governmental Affairs U.S. From UBS Studios, I'm Dan Cassidy. Thank you for joining us.
Thank you for tuning in. Be sure to visit ubs.com slash studios to view the entire UBS Studios suite of podcast channels, along with our video offerings, such as UBS Trending. You can also follow us on Instagram for content highlights at UBS Trending.
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