Trump needs a TACO?
The US midterms are just around the corner, and polls show Democrats leading Republicans 52% to 43% on which party voters want to control Congress, while Trump’s approval rating stands at 39%, versus 59% who disapprove.
To avoid losing their majority in Congress and making it harder to push through the Republican agenda, the administration needs some good news heading into the elections. And aside from the economy and labor market still holding up, there isn’t much of it right now.
For starters, the average 30-year US mortgage rate has climbed to 7.50%, its highest level in two years, while diesel prices have hit a record above $6.50 per gallon, up nearly 70% year-on-year. Hence, the University of Michigan’s year-ahead inflation expectations came in at 4.6% in September, up from 4% in August and the highest since June, while the five-year outlook edged up to 3.4%, pushing up expectations for further Fed tightening and subsequently, treasury yields.
A better geopolitical backdrop would help, but hopes are still slim.
On the Russia-Ukraine front, Russia’s federal defense spending is set to rise to 17.1 trillion rubles in 2027, suggesting a near-term peace deal isn’t part of the government’s base case. NATO Secretary General Mark Rutte has also said the alliance will do more, not less, for Ukraine.
So the chances of strikes on Russian oil refineries stopping anytime soon, or the Black Sea becoming fully safe for shipping, and with that oil prices will correct are low.
As for Iran, Trump rejected Tehran’s seven-day ceasefire proposal, which would have involved lifting the US blockade and easing sanctions in exchange for reopening the Strait of Hormuz and restarting nuclear talks. Iran, meanwhile, expects the conflict to escalate after the US midterms.
On trade, the truce with China was extended for another two months. Better than nothing, but markets had hoped for longer, and there’s still little progress on the bigger issues like Taiwan, strategic competition and the long-term trade relationship.
The problem is that a divided Congress would add another layer of uncertainty to US policy, which is hardly ideal for markets. So as the midterms get closer, we could see more TACOs, but the effect may be short-lived without real solutions.