Top of the Morning: POTUS 47 - IEEPA hearing, Election Day, Government shutdown

Hi everyone, Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel. For today, we will continue with our ongoing series of POTUS 47 related conversations here on the podcast.

That means once again joining me right here in studio, I'm glad to welcome back Kurt Ryman, Head of Fixed Income Americas with the UBS Chief Investment Office. Kurt, great to have you back. Thank you for dropping by and for spending some time with our listeners and their clients here on the podcast.

It's great to be here. There's a lot to review. Things are moving fast.

Definitely. I know we spoke, it was only a couple of weeks ago at this point, but a lot has taken place in between. And upfront, as always, I do like to remind you, our listeners, that any and all resources updates as it relates to CIO's POTUS 47 coverage are made available for you up on the website, ubs.com forward slash POTUS 47.

Though with that housekeeping, Kurt, out of the way, as we're speaking here on election day, I will note on Tuesday, November 4th, we are continuing to experience the impacts of the U.S. government shutdown, which at this point has surpassed one month. So I'm curious, how do you assess the impacts of this government shutdown to economic activity, continuity of select government services, seeing as how we're over a month in, any indication at this point as to when this will all be resolved? Yeah, the longer this lasts, the greater the worry that it could have material economic consequences.

Our initial framing was that if it lasted up until about this point, meaning the longest in history, then we would probably get out of it with a very small impact on the economy. Because what happens is the government shuts down, that's a drag in the months or quarters, and then it reopens, and that's a boost. So you get paid back, in a sense.

And the economic fallout isn't that great. But it does start to complicate the view on where is the economy at a time when you might be getting some residual delayed impacts on the inflation side or on the output front from the longer lasting tariffs or some of what's been happening on the immigration front. So these matter, and we're not getting the public sector data to help support the flight plan for the Fed, for example.

And they've got a meeting next month, and it's not clear what they're going to do. I think the market was pretty well set on the idea of another rate cut, that's our view, in December, and then another one in the following quarter, the start of 2026. But that's backed off because of some of the comments that we've heard from Federal Reserve officials.

And then if this lasts a lot longer, let's say up until Thanksgiving, then yeah, we are going to start feeling incrementally more of an economic impact. And that matters. It'll matter for markets.

I think we're getting closer to a resolution based on some of the mood music at the Capitol. The Democrats forced the shutdown. They've gotten beyond the date at which the renewals of the Affordable Care Act go out.

The sticker shock from that has now happened in many cases. We have election day today. They may want to see and take the pulse of what they've seen in the results there.

So yeah, I mean, they're probably not going to get what they... Very often, the party that initiates the shutdown by not voting with the party in power, they end up not getting the legislation they want during the shutdown. But there have been some bipartisan talks on how to get out of this.

They only need another, I think it's five more Republican Democrat votes to get the continuing resolution across the line. So yeah, this week or next week seems pretty likely as an estimate for when they're going to bring this thing to a close. Senate Majority Leader John Thune indicated today, according to reports, optimistic perhaps that we will see a reopening of the government or a resolution achieved this week.

So we shall see what plays out. As we are speaking here on election day, Kurt, what are you watching out for in terms of what's at stake for Republicans and Democrats this election cycle? What are some of the implications of potential outcomes of today's voting?

Sure. So, well, right here in New York City, we have the mayoral contest where Democrat assemblyman and self-declared socialist Zoran Mamdani is projected to win over the other challengers. As well as Democrat and former New York State Governor Andrew Cuomo.

That's a very closely watched contest. My home state of New Jersey features a close race for governor between Democrat Mikey Sherrill and Republican Jack Zittorelli. And in Virginia, we have also a Democrat that's in the lead there.

So, you know, it's kind of, yeah, you know, quasi very close race in New Jersey. But it's, you know, if the betting markets and the polls are correct, we'll have a Democrat sweep of all three. And if that happens, then they'll claim they have the upper hand in the shutdown talks.

They might infer a strong position in next year's midterm elections. Although that's a way that's pretty far off. A lot can change between now and then.

But if Republicans can pick up New Jersey, if they can win the governor's race there, then they can claim a victory for the Trump agenda and say that it's gaining some traction with voters because New Jersey has that longstanding tendency to lean Democratic. So that would be a big win for the Republicans. Here in New York, you know, the election outcome is also consequential.

Municipal bond investors have been looking at this to think about what that means. I would point you to a blog post that our municipal strategist Jeanine Lennon published at the end of last week. And in that report, Jeanine writes that while New York City's primary elections are ranked choice tabulations, the general election isn't.

And that suggests that we're going to know the winner pretty soon. So regardless of who wins, we're comforted knowing that there are substantial oversight measures and strong financial controls that are in place to mitigate the risk of any one person influencing the city's finances. So just keep that in mind.

You know, going back to some of our longstanding advice on elections, vote at the voting booth, not in your portfolio. And with that, that blog, by the way, the title New York City Elections Trick or Treat post as a question is available up on UBS.com forward slash CIO if our listeners would like to read further into that. President Trump recently coming off of a highly anticipated trip to Asia.

What are your takeaways in terms of progress made on trade talks in particular and specific to China? What might be some next steps there? Yeah, the president was able to tout some trade deals with some of the smaller Southeast Asian countries.

We'll see if he's able to close a deal with Taiwan anytime soon. That's a that's a that matters. That's significant.

But the real spotlight, as you say, was on the tactical shallow truce between the two leaders, Xi and Trump in Busan. Any larger breakthroughs on more consequential and strategic issues like, say, for example, Taiwan or China's access to cutting edge semiconductor chips, that's going to have to wait for a summit potentially in April. That's the date they're floating.

But these dates have been slipping. So the state could also what we're seeing emerge this year is a pattern of minor irritants that then lead to an escalation, followed by a de-escalation for a few weeks or even months. We get some stability and then we're back to escalation.

It's not clear yet if this is part of some process of working towards a bigger deal, you know, kind of escalate to de-escalate or if it's a one step forward, two steps back kind of process towards a strategic decoupling going to have to wait and see how that's all emerging because there was some, you know, there was some body language there where, you know, despite what is a, you know, like we talked about the government shutdown, you know, Congress agrees on one thing and that's an anti China stance. But, but Trump did show, I mean, substantial respect for Xi as a leader, as a peer on the world stage. I think that's really notable.

But for now, you know, it buys time for both sides. They get to insulate their economies and reduce some of their dependencies. Maybe have some more, you know, kind of ministerial level meetings to iron out the discussions on bigger issues.

But the fact is we got to, it's a placeholder, you know, the U.S. got some, some concessions on purchasing soybeans, on not activating the rare earths card and they cut tariffs on fentanyl and China could claim that they got some reduction in tariffs, that there was some stabilization in the trade relationship. That means less risk on their economy. And I mean, the respect that, that she got from the president was, was notable.

And just getting a standstill on tariffs and export controls, even if you don't get the rollback on export controls on chips, just a stabilization was something for one year, right? Yeah. More to go, more to talk.

But for now, it seems to be a truce. On a somewhat related note, following up on a topic we covered here on the podcast a few months ago, the Supreme Court justices will weigh tomorrow on November 5th, whether the Trump administration acted lawfully when it implemented tariffs via the use of the International Emergency Economic Powers Act or IEPA for short. So what are your expectations for tomorrow's hearing?

Right, exactly. So it is a hearing. They're holding oral arguments.

The ruling will come most likely later this year because they're seeing this on an expedited basis. It could come, it could slip into early next year. But 10 a.m. tomorrow, if you want to listen in, you can go to the Supreme Court's website.

I will be there listening. It's a fascinating case. It really is.

I mean, the International Economic Emergency Powers Act or IEPA has never been used to levy tariffs. So it's the first time. There's no precedent.

We don't know how the court's going to rule, although it seems as though they're going to declare them. I mean, the constitutional scholars, people who follow the Supreme Court, really smart people who have a lot of background, they disagree on the outcome. They read it differently.

And it's not just whether you side with the president or not. It's not just if you were appointed by a Democratic or a Republican president. It's not that simple.

There's a lot to this case, and I'm not going to go into it because we don't have the time. But what we're talking about is 70% of the revenue that the administration has collected this year in tariffs. It's the baseline tariffs.

It's the reciprocal tariffs, fentanyl, immigration, Brazil, India. And we're preparing for an illegal outcome because the legal outcome is just the status quo. Nothing really changes.

The president continues to be able to flex and really use this power rather whimsically, chaotically to impose will. And we should mention this does not affect the sector tariffs on cars or steel and aluminum. It doesn't affect the Section 301 tariffs on China from the first administration.

We have a report that's up on the POTUS 47 site, which you can go to. There's a lot to cover. But let me just say, if they're illegal, the first thing is the refunds.

Companies that paid the tariffs, the import tax, will be entitled to a refund. It could get tricky. The court could make it difficult by requiring companies that paid the tariff to file separate lawsuits.

It's about $130, $140 billion of refunds. That's a small fiscal boost. It's a half percent of 2024 GDP.

It's a modest windfall for the importers. It is going to worsen the U.S. fiscal position. By that, I mean that the 2026 projected budget deficit as a share of GDP would go from just under 6 to just under 7%.

It's not the end of the story that we've been talking about together here on this podcast about the ability of the administration to rebuild the tariff wall. But rebuilding it means that the tariffs are going to look very different. It's not this baseline, even tariff that collects a lot of revenue.

It's targeted towards countries that are running trade surpluses. It's targeted at specific products. It's much more targeted, much less flexible, much more limited in scope, and will take a long time to unfold because it requires investigations.

It's more bureaucratic. Taking it through to the economic and financial market implications, what matters is if countries retaliate and if it escalates. We don't think they're going to.

China has rare earths leverage, but broadly speaking, we don't think that countries are going to retaliate against any new tariffs that are imposed. You rebuild the tariff wall. You get more targeted tariffs on the specific products and countries.

That probably brings in a little bit of extra volatility, especially around the products that are affected, but it's probably short-lived, episodic. As for the investment implications, a lower U.S. effective tariff rate and no retaliation, that's supportive for stocks because you would think that it improves consumer spending power. Again, it's not taking all of the things that matter for the stock market into consideration, but we're just saying the tariff piece, as we're thinking about the market's outlook for next year, would be broadly, I'd say, positive if the tariffs are declared illegal.

Then on the bond market, more limited inflation, more room for Fed rate cuts, but a worse deficit outlook does ... I think we would be postured for a steeper yield curve. The front end's anchored, but back end yields might move up some just on the term premium, and a concern about the U.S. fiscal health.

Those are the two takeaways that I think are important as a result of this IEPA question. We won't know the answer until the end of the year, but those hearings tomorrow are going to be very important for getting clues about how the Supreme Court may rule. Well, very helpful, Kurt, to have an understanding of potential market impact implications, depending on how this goes, and clearly a lot at stake here for the administration.

It gives us a lot to follow up on with our listeners, but Kurt, thank you again for dropping by. You covered a lot of ground on today's episode, and I do look forward to picking back up with our conversation in December. Same here.

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