Midterms matter; all about CPI, bitcoin rally stalls

US stocks edged higher as Wall Street awaits both the midterm elections which could bring an end to President Biden’s blue wave and a pivotal inflation report. Tuesday’s US midterm elections could be market-moving if we see a Democratic surprise or if Republicans dominate the polls, but most traders are zeroing in on Thursday’s inflation report. ​

It is still all about inflation and while this report might not be as hot as the last few, it still should show that rents and the core-service sector part of the economy are still hot. Inflation might not fall as quickly as some Fed members are expecting and that could support the idea that rates will stay higher for longer. ​ ​ ​ ​

All eyes on midterms 

The Democrats’ lock on Congress is likely coming to an end. ​ A divided government means we won’t be seeing a big fiscal stimulus response next year when the economy is in a recession. The official results might take a little while longer to come in but we should have a good picture on election night. ​ Republicans need just five seats to take back that House and most polls suggest that should not be difficult. ​ ​

The Senate is where it gets interesting. ​ A close election in Georgia could end up triggering a runoff election, while Nevada’s election is viewed as a tossup. ​ The Democrats are trying to defend Senate seats in Arizona, and New Hampshire, while Republicans want to keep their seat in Pennsylvania.

The reason investors are so fixated with this week’s inflation data instead of the midterm election is that it seems highly likely the Republicans will win one of the chambers this week. Even if the Republicans win both the House and Senate, the bullish reaction for risky assets might be short-lived. ​ ​ A Republican sweep this week would confirm that won’t see a major fiscal response from the Biden administration once the economy falls into a recession. What will also weigh on markets is that a Republican sweep increases the odds that next year’s debt ceiling talks could get ugly very quickly.

Crypto

Bitcoin was unable to push higher as risk appetite quickly faded this morning. ​ It seems bitcoin is still set on being a risky asset and that means it might struggle to do anything before we get past both the midterm elections and inflation report. ​ Bitcoin should still find a home above the $20,000 level post-midterms as long as we don’t get a Democratic surprise. A Republican sweep could support a push above the $21,000 level for bitcoin but that might not last until the latest inflation data. ​

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