Wall Street rallies on US midterm election implications and Fed outlook

Following a bullish session in Asia, with the Japanese index Nikkei 225 (JP225) reaching its highest level since the 15th of September at around 27,861 points, US stock indexes rose for the third straight session as voting began in the crucial midterm election. The widespread belief is that a Republican win will make it really hard, if not impossible, for Democratic President Joe Biden to carry out proposed tax rises. At the time of writing, the Dow is up 1.43%, the S&P 500 is up 1.15% and the Nasdaq is higher by 1.63%.

When combining the bullish prospects of the elections with a recent turn in sentiment surrounding the Federal Reserve, risk-on is the name of the game this week. Investors are hoping for a political gridlock that could prevent radical policy changes and for a slowdown in the pace of rate hikes from the Fed. Control of just one chamber of Congress by Republicans would put a block on President Joe Biden's legislative push for more business regulations. ''Congressional Republicans have threatened a debt ceiling showdown next year in an effort to cut entitlements and Medicare if they win a majority in the House.  In recent weeks, polls have been tilting in favour of the Republicans in both the House and the Senate,'' analysts at Brown Brothers Harriman explained. 

When can we expect results?

The Telegraph explains that ''the first wave of vote tallies are expected on the East Coast between 7 pm and 8 pm EST (12 am and 1 am GMT). An early indication of Republican success could come if the races expected to be close - like Virginia's 7th congressional district or a US Senate seat in North Carolina - turn out to be Democratic.

By around 10 pm or 11 pm EST, when polls in the Midwest will be closed for an hour or more, it is possible Republicans will have enough momentum for experts at US media organisations to project control of the House.''

US CPI and Fed outlook

Sentiment slipped on the back of last week's nonfarm Payrolls data and a pivot is eyed by markets sooner than later, despite the Chair Jerome Powell's pushback following last week's Fed decision. In his presser, he advocated a higher terminal rate vs market expectations. However, the Unemployment Rate was a disappointment on Friday and investors are of the mind that a slower pace of tightening is on the cards. We will get one more jobs report and two sets of inflation and Retail Sales data before the December 13-14 meeting. Meanwhile, WIRP suggests a 50 bp hike then is fully priced in, with 30% odds of a larger 75 bp move. The swaps market continues to price at a terminal rate near 5.25%. This brings us to this week's key event in the US Consumer Price Index.

''A below consensus print is likely to help push the pricing for the terminal funds rate modestly lower, likely bull steepening the curve in the process,'' analysts at TD Securities argued. ''The risk of a lower reading is why we took profit on our 2s10s curve steepener last week and went long 10y Treasuries, which we viewed as attractive.''  Ultimately, this would be encouraging for stocks as a softer core print will exacerbate positioning which has moved to swiftly reduce USD longs recently and support risk appetite.