Not only have polls and prediction markets tilted recently toward Donald Trump winning the presidential election, they are also pointing to Republicans flipping the Senate and retaining control of the House.
A GOP sweep would give Trump a freer hand to enact his agenda. While U.S. presidents have broad authority on immigration and tariffs, changes to tax and spending policies would require congressional approval.
The latest polling analysis from 538 gave Trump a 53-in-100 chance of winning the election versus 47 out of 100 for Kamala Harris. It also gave Republicans an 87-in-100 chance of taking the Senate majority away from Democrats and a 53-in-100 chance of holding the House.
Prediction markets are showing similar odds for Congress and wider odds for the White House. According to Kalshi, Trump has a 62% chance of winning the presidential election, with the GOP's odds of winning the Senate and House at 85% and 52%, respectively.
Meanwhile, the new IBKR Forecast Trader from Interactive Brokers puts Trump's odds of victory at 63%, while Democrats have just 13% odds of holding the Senate and 48% of flipping the House.
That's a sharp reversal of fortune from the summer, when Kamala Harris and Democrats were riding a wave of enthusiasm after she took over the top of the ticket from President Joe Biden. Top pollster Frank Luntz attributed the loss of momentum to her campaign's shift in strategy toward a more anti-Trump message and away from a pro-Harris one.
For the economy and financial markets, a Republican sweep in November could raise the stakes even higher.
That’s as the former president has teased a range of tax cuts and even eliminating income taxes altogether in favor of replacing revenue with tariffs, which could worsen federal deficits.
His promises to hike tariffs across the board and begin mass deportations of undocumented immigrants are also seen as inflationary, potentially adding pressure on the Fed to keep rates higher for longer.
Trump and his allies have also signaled plans to have more influence over Fed policies and the appointment of Fed policymakers, which require Senate approval.
The past week's market selloff was due in part to election jitters as "red sweep talk is occurring all over Wall Street and Washington," wrote José Torres, senior economist at Interactive Brokers, in a note on Wednesday.
In addition, Yardeni Research also sees "bond vigilantes" throwing their weight around in financial markets, pointing to the recent surge in U.S. Treasury yields. While they oppose the Federal Reserve's half-point rate cut last month, investors are also assessing the fiscal outlook.
“The Bond Vigilantes may also be voting against Washington, figuring that no matter which party wins the White House and the Congress, fiscal policies will bloat the already bloated federal government budget deficit and heat up inflation,” wrote Ed Yardeni, president of Yardeni Research, and Eric Wallerstein, the firm’s chief markets strategist. “The next administration will face net interest outlays of over $1 trillion on the ballooning federal debt.”
