Higher interest rates and stocks are about to battle it out and why is the Fed likely cutting rates tomorrow?/Earnings comments

We of course wait to see who will win the House as the outcome will determine the fate of the major legislative deadline of the expiring Trump tax cuts at the end of 2025. I'll say again, the high US budget deficit is because of the spending side which is about 23% of GDP vs the tax revenue component which typically hovers around 17% regardless of tax rates. Either way, at best, tax policy likely stays the same as the low hanging tax cut fruit in 2017 is no longer here. 

On the potential for a ramp up in the tariff war, I worry very much about a scattershot approach. 

M&A bankers are happy today as are all those companies who have been looking to do deals and those industries like financials who will see an easing of the regulatory pressure. For those CEOs that were blaming the election for hesitancy for capital investment and/or traffic trends, we'll now see to what extent that changes.

For stocks, the key from here is at what point does this rise in interest rates matter as the 10 yr yield is approaching 4.50% and the S&P 500 now trades at 24x 2024 earnings estimates. By the way, the 2 yr inflation breakeven is jumping by 14 bps this morning to 2.52%. The 5 yr breakeven is higher by 16 bps to 2.49%. 

As for the Federal Reserve, we heard a lot before the first rate cut in September from Jay Powell & Co about needing 'confidence' that inflation was falling to target in a sustainable fashion in order to start cutting rates. While in the coming months the inflation stats could continue to disinflate, in light of all of the above can they really have 'confidence' that inflation will stay down in light of the potential economic and market reaction to the election, among other things? I wouldn't think it's even possible to have that level of confidence that should trigger a rate cut tomorrow, especially after going 50 bps in September. They always have December, and 6 weeks after that, and another 6 weeks after that, etc...to decide. 

As we know rents are a big part of CPI, here is what AvalonBay Communities said yesterday and who does not have much sunbelt exposure where most of the rent pressure is taking place: