US election monitor: The race remains closer than prediction markets suggest

In recent weeks, prediction markets have shifted significantly in favour of Trump. According to Polymarket, the former president is now the clear favourite for the Oval Office on November 5th, leading Harris by 21.7 pp.

At the same time, prediction markets are also pricing in a higher probability of a Republican sweep, with the odds at 42.5% compared to 13.5% for Democrats. Notably, Republicans' odds of winning the House elections have risen alongside Trump's recent surge. This has lifted the conditional probability of a Republican sweep as the party is also favoured to win the Senate. However, we emphasize that the House elections remain very difficult to call. Since 1960, the winning party has held the House in 9 of 16 elections.

We also flag that when comparing recent polling data from swing states with prediction markets, the polls point towards a much tighter race. Trump leads in every swing state, but by an overall slim margin of 1.0 pp. In comparison, Harris was ahead by narrow 0.5 pp. in late August, highlighting how quickly the tide can turn.

Interestingly, Trump's advantage in the traditional Republican state Arizona has shrunk. Instead, his recent momentum gain is largely attributed to advancements in the historically Democratic strongholds, Michigan and Nevada. Michigan, home to the largest Arab American population in the US, has long been frustrated with the U.S. stance on the war in Gaza, particularly the lack of an immediate ceasefire. The turn in Michigan polls coincided with Israel's escalation towards Lebanon, which could explain Trump's current lead in the state. However, it should be noted that while Trump has an edge, polling results still show support for Robert F. Kennedy Jr., which could tilt the balance unexpectedly on the election day.

In Pennsylvania - considered one of the heavyweight swing states with 19 electoral votes - Trump holds a narrow lead of 0.8 pp. While Trump won the state in 2016, it has traditionally leaned Democratic, similar to Michigan and Nevada. Additionally, since 2008 the winner of the presidential election has also secured the electoral votes from Pennsylvania. The state's considerable significance on the election is highlighted by the fact that 25% of campaign spending on ads between September 1 and September 20 was concentrated there, according to AdImpact. From Trump's perspective, winning only the southern swing states (Georgia, Arizona, North Carolina and even Nevada) will not be enough to guarantee the election victory, which means that Pennsylvania, Michigan and Wisconsin will play a pivotal role in the final outcome.

So overall, while polling data from swing states does indicate that Trump has gained some momentum, the race remains extremely close. The large change in prediction market odds could have impacted broader financial markets as well. Broad USD index has gained support and UST yields have shifted higher, driven by rising term premium, which we think could be linked to concerns of faster inflation and debt sustainability due to Trump's fiscal policy plans. This means that as the election date approaches, even small changes in tight polls could drive seemingly erratic swings in market sentiment. 

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