Podcast | Thought on the Market

Michael Zezas: Will the Democrats Go Big or Go Small?

Morgan Stanley
Banking, Finance, Investment Strategies

The eventual size of the Democratic Party’s fiscal policy legislation – for taxes and for spending – will likely impact the bond market as well as the policy landscape.

—– Transcript —–

Welcome to Thoughts on the Market. I’m Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I’ll be talking about the intersection between US public policy and financial markets. It’s Wednesday, September 29th at 1:00 p.m. in New York.

 

It’s shaping up to be one of the most consequential legislative weeks on record in the US. At stake is the size and fate of Democrats’ fiscal policy ambitions, specifically their goals of a major tax increase to fund a substantial expansion of infrastructure spending and the social safety net. But intraparty disagreements on the content of these efforts have left investors wondering: what will the final package do to the U.S. fiscal outlook and, therefore, the trajectory for bond yields? Will the Democrats go big, keeping yields moving higher, or go small, potentially meaning the worst of the recent increase in bond yields is behind us?

 

Our current thinking is that the Democrats eventually end up going big. Why? Because neither of the two legislative vehicles they’re considering are possible without the other – they’re linked. Moderates, particularly in the Senate, may be happy with approving the smaller bipartisan infrastructure framework, or BIF. But progressives don’t appear content with just this achievement and continue to argue they’ll withhold their votes on the BIF until the whole of the party endorses a specific plan for the bigger budget reconciliation bill. This de facto linking of the two bills may mean that Democrats’ planned votes this week to pass the BIF gets delayed, but it keeps the party on track for what we think would be a combined increase in spending of over $3T over 10 years, adding upwards of $1T to the deficit over the first five years. That would help keep support under the economic recovery and the upward trajectory of bond yields over the medium term. It could also mean equity markets are choppy in the near term as they digest a meaningful incoming tax hike.

 

But breaking that link and going small is something we have to consider too. If progressives give in and vote for the BIF without a dependable agreement on reconciliation, the moderates will be in the driver’s seat on the rest of the negotiation – and already key moderate Democratic leaders have said they’d delay the timing and dilute the size of the reconciliation bill. In that case, we’d substantially mark down our expectations for the impact to deficits, as well as for the scope of tax hikes. For this outcome to become more likely, look for a public signal from the White House to persuade progressives to vote for the BIF by explicitly endorsing the strategy of voting on it before reconciliation is agreed to.

 

We hope this can be a guide to track how the situation develops over the next few days. And we’ll of course be paying close attention and be back next week to size it all up again.

 

Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague or leave us a review on Apple Podcasts. It helps more people find the show.

Recommend a podcast...

More by

Podcast

October 22, 2021

Morgan Stanley

Sustainably generated hydrogen has great promise as a fuel where electricity alone won’t suffice, but the road to its broad adoption remains complicated for investors to navigate. —– Transcript —–Jessica…

Podcast

October 21, 2021

Morgan Stanley

The bipartisan infrastructure and ‘Build Back Better’ plans remain in legislative limbo, but what could their passage mean for markets? —– Transcript —–Welcome to Thoughts on the Market. I’m Michael…

Podcast

October 20, 2021

Morgan Stanley

Moves toward scale and consolidation show promise for what is already a burgeoning content industry. —– Transcript —–Andrew Sheets Welcome to Thoughts on the Market. I’m Andrew Sheets, Chief Cross Asset…

Podcast

October 19, 2021

Morgan Stanley

With supply chain pressures and rising costs still weighing on markets, retail investors continue to see long term value.—– Transcript —–Welcome to Thoughts on the Market. I’m Mike Wilson,…

Podcast

October 15, 2021

Morgan Stanley

Consumer saving is up, way up. But whether investors put this money into the markets may have more to do with how much wealth is already in play.—– Transcript…

Podcast

October 14, 2021

Morgan Stanley

Last week, over 130 countries announced an agreement to overhaul international tax rules. The changes may seem high-level, but should investors pay closer attention?—– Transcript —–Michael Zezas Welcome to Thoughts…

Podcast

October 14, 2021

Morgan Stanley

With supply chain delays in air, ocean and trucking on the minds of investors worldwide, what could it mean for the labor market and consumers headed into the holiday…

Podcast

October 12, 2021

Morgan Stanley

Investors appear nervous about the economic outlook as 3rd quarter earnings season approaches. Are stagflation concerns justified… or perhaps overdone?—– Transcript —–Welcome to Thoughts on the Market. I’m Graham Secker,…

Podcast

October 11, 2021

Morgan Stanley

As the weather chills and we head towards the end of the mid-cycle transition, the S&P 500 continues to avoid a correction. How long until equities markets cool off?—–…

Podcast

October 8, 2021

Morgan Stanley

Investor worries over growth and inflation have revived the term stagflation—but with growth indicators historically solid, is it an accurate description?—– Transcript —–Welcome to Thoughts on the Market. I’m…

Podcast

October 8, 2021

Morgan Stanley

Affordability pressures continue to mount as housing supply tightens. How long will home prices continue setting records and what could it mean for credit availability?—– Transcript —–James Egan Welcome…

Podcast

October 6, 2021

Morgan Stanley

Discussions in D.C. over the infrastructure framework, budget reconciliation bill and debt ceiling could impact more than just politics. What could it mean for stocks and bond yields?—– Transcript…

Podcast

October 5, 2021

Morgan Stanley

New data on an oral antiviral treatment could have significant impact on the COVID treatment landscape. What’s next for treatments, booster shots and child vaccines.—– Transcript —–Andrew Sheets Welcome…

Podcast

October 4, 2021

Morgan Stanley

After 16 years, German Chancellor Angela Merkel is stepping down. While the full implications for Europe remain unclear, some contours of the post-Merkel government are now taking shape.—– Transcript…

Podcast

September 29, 2021

Morgan Stanley

With incoming global growth data missing consensus expectations, emerging markets equity earnings revisions could fall back into negative territory for the first time since May 2020.—– Transcript —–Welcome to…