Last week, President Biden for the first time endorsed eliminating the filibuster from the US senate, following similar comments from Senator Manchin (a centrist Democrat and key swing vote in the upper chamber) earlier in the year.
Essentially, the filibuster is a mechanism that allows a minority of 41 from the 100 US senators to block legislation – one of many checks and balances that have historically made it difficult to stray too far from the political status quo in Washington.
Its potential removal therefore represents an important shift in US politics and opens the possibility of the Democrats using their control of congress and the White House to embark on an ambitious progressive agenda.
We shouldn’t get too excited yet, though, as it’s not clear whether filibuster reform will go ahead. In the days since Biden indicated his support for change, there has not been overwhelming support from Democratic senators – Manchin notwithstanding – and they would all need to approve such a move.
In part, their hand may be stayed by awareness that the filibuster is a double-edged sword. Cutting it may lead to the passage of more Democratic policies today, but equally it would leave any future Republican majority less constrained.
Furthermore, even if the filibuster does go, it does not mean every Democrat proposal would enter law. The party would still need to be unified given its slim majority, so we are realistically talking about this paving the way for centrist policies rather than those that are seen as more extreme (including the $15 minimum wage, Green New Deal, and corporate tax hikes – although compromises could be struck on all of these, such as an $11 minimum wage).
Filibust some moves
All that said, we should not discount the implications for markets. So far, the stocks most likely to be sensitive to Democrat proposals have not moved much, suggesting equities have not priced in a big change in the probabilities of more Democrat policies becoming law over the past few days.
Arguably, though, if the filibuster does go and it’s as important as we think, there would be a lot more repricing in politically sensitive sectors. Among these are companies disproportionately impacted by taxes, infrastructure builders, the decarbonisation sector, healthcare, and big tech (although a ‘techlash’ doesn’t seem a great priority for mainstream Democrats, not least given technology’s strategic importance).
In fixed income, we should pay some attention to inflation expectations if legislative blockages give way to fresh stimulus flows. Federal Reserve Chair Powell has insisted that rate policy would follow actual data on inflation and the labour market, rather than be driven by forecasts, but the yield curve has been rapidly steepening. 10-year government bond yields have continued their ride higher, with the first three months of 2021 creeping into the worst five quarters on record for US Treasuries.
Nevertheless, despite yields’ march higher, they are still lower than they were in 99% of months since records began in 1790. We therefore believe that low interest rates will continue to pose challenges to asset allocators.
Finally, last week we commented upon the headwinds facing commodities from China’s less assertive economic growth objectives and dampening credit growth. One counterargument, however, is infrastructure expansion in the US reinvigorating another supercycle.
But for US infrastructure plans to have a material impact, we think we would need to see spending climb by 50% per annum in the coming years. Could the filibuster’s demise unleash further Democratic spending sprees to such an extent? We will be watching, in line with our ‘prepare, don’t predict’ approach.