Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between US public policy and financial markets. It's Wednesday, July 28th, at 10:30 a.m. in New York.
All week long, investors have been hanging on the headlines about the $600B bipartisan infrastructure plan. The concern? That talks could break down and the market might have to adjust to lower economic growth expectations as a result. We're not as worried. In fact, by the time you hear this, the deal could have fallen apart or definitively succeeded. But we don't think that matters much. While the success or failure of this bipartisan plan could be important for political reasons, for investors we think it's mostly procedural noise on the way to eventual approval of a spending plan that will total $4T over 10 years.
Why? Because Congressional Democrats already have a plausible way to make sure the spending plan is enacted. If those bipartisan talks break down, democratic leaders have already signaled they would simply add that spending to their planned $3.5T budget reconciliation bill, which is eligible to pass the Senate with only the support of all 50 Democrats. We think that's a viable strategy as programs whose spending totals up to that number are already supported by all Senate Democrats. And while some key Democrats have vociferously resisted passing the spending plan without a significant attempt at a bipartisan bill, that significant attempt appears to have already happened since the length of bipartisan negotiations can now be counted in months.
So investors would be wise not to conflate the prospects for this bipartisan deal with that of the broader fiscal policy. For us, that means our base case remains on track: $4T of spending, $1.5-2T of revenue increases, and thus about $250-500B of deficit expansion next year. That's real support for continued strong GDP growth in the short term and likely a challenge for the bond market, where our rates strategy colleagues see current Treasury yields well below fair value, partly driven by the lack of faith in this U.S. fiscal policy path.
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