The fate of the Senate had been hanging in the balance since November, as two seats remained up for grabs in Georgia. A democratic win there would make a big difference for Joe Biden’s Presidency and of course the markets.
As none of the candidates achieved over 50% of the votes back in November, it all came down to a runoff. To the surprise of many, both Democratic candidates managed to flip the seats blue and win.
So, why did this single runoff for two senators matter?
Since Republicans hold 50 of the seats, and Democrats held 48, the two seats flipped in Georgia means the Senate is now a 50-50 split. But even with a split it’s good news for Democrats, as the vice president gets the deciding vote. This means that incoming vice president Kamala Harris gives them the edge.
Winning Congress gives Democrats control of the White House, the House of Representatives and Congress. Having control of all three, makes it much easier to pass legislation and approve nominees for cabinet and judicial positions.
One of the main focuses for the markets recently, has been on the fiscal stimulus side of things. Last year we saw a big roadblock was with Republicans and Democrats not being able to come to an agreement for a large scale package. So this new situation now removes that roadblock and Biden is more able to deliver on his agenda, which is expected to lead to bigger spending on pandemic-relief and infrastructure projects.
Increases in spending without an increase in taxes will typically push up treasury yields, as there’s an expectation that there’s going to be more government borrowing. This means there will be a bigger supply of bonds in the market.
We have already seen 10 year treasury yields hitting 1% for the first time since March. Among other things, long-term yields help to set interest rates. For the past 9 months there have been ultralow yields, which have helped reduce borrowing costs, leading to investors buying riskier assets like stocks and corporate debt.
This may have an impact on other markets, such as stocks. But right now, it seems that the expectation of more fiscal stimulus is being seen as a positive and something that will speed up economic growth, so stocks have been bullish. This is a good sign.
Obviously if there’s economic growth, that can lead to inflation, but that’s something to consider over the longer term. The Fed has already said they are willing to let Inflation surpass the 2% target, so things are likely to stay accommodative. Although the New York Fed has already suggested inflation may come back "much more quickly than the consensus suggests” and the US 10-year breakeven inflation rate rose to the highest level since 2018, so inflation expectations are rising.