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Midterms: Dollar Likely Unfazed; Debt Limit A Big 2023 Issue

US OUTLOOK/OPINION

As noted in our midterms asset class outlook circulated earlier - under the consensus case for 2022, 2018’s outcome could echo this time around, with the Fed tightening into an economic downturn/recession expected by many by late 2023.

  • The consensus outcome of Democratic losses in 2022 will, on margin, do little to derail the dollar’s rise. And unlike historically in midterms, where policy is in limbo, the White House might rely heavily on executive orders as opposed to legislation. For example, Biden could take an increasingly populist tack going into his re-election year in 2024, particularly on trade – which would further undermine some foreign currencies’ appeal.
  • Equities will probably benefit, but it’s not straightforward. Divided government result as it tends to reduce equity market uncertainty. But today is a little different since the White House is likely to exercise executive orders more extensively than the historic post-midterm equity record might suggest.
  • The baseline for Treasuries is somewhat more mixed: there wouldn’t be much change in the macro configuration. But the debt limit will become a hugely contentious issue under a Republican Congress, and some brinksmanship is to be expected in 2023. That’s probably priced, but the ultimate impact on Tsys is hard to gauge: we’d be more inclined to expect a “safe haven” move if the debt issue comes to the brink, though have seen arguments that such a bid might not materialize this time.

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