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Democrats took control of Congress last night, with both the House and Senate flipping in a decisive midterm victory. The results are a political setback for the Trump administration, and the policy direction in Washington will shift as Democrats pursue their own legislative agenda. Markets now face a divided government and are embracing the outcome, with stocks rallying today and Treasury yields moving lower.
Looking at the Senate, Democrats flipped seven Republican-held seats, moving from 47 before the election to at least 54. The flips came in Iowa, Kansas, Maine, North Carolina, Ohio, South Carolina and Texas. Alaska and Mississippi remain uncalled, but Democrats have already secured enough seats to control the chamber. With 51 seats needed for an outright majority, 54 represents a significant majority.
On the House side, Democrats entered the election with 214 seats and needed a net gain of four to take control. They have already picked up enough Republican-held districts to win the majority, although dozens of races remain uncalled, but the final tally could be around 80 seats.
Starting with the manufacturing index, which came out Monday, the composite factory index increased to 55.5 from 54.5, its second-highest level in more than four years. Factory production reached its highest level since late 2021, while demand remains healthy as the sector has now expanded for 10 consecutive months.
Strong consumer demand, economic growth and business investment related to AI and data centers are helping support the numbers. The concern continues to be inflation, as the prices-paid component remains elevated amid tariffs and pressures related to the Iran war.Although markets tend to place more emphasis on the manufacturing report, services constitute a much larger portion of the U.S. economy. Earlier today, the ISM Services Index for October cooled slightly to 54.5 from 54.9, and while new orders fell to a four-month low, they remain well within expansion territory. One positive was the employment component, which improved to 51.4 from 50.1. In total, 15 of 18 service industries expanded in October, up from 13 in September. Just like manufacturing, however, inflation remains a concern. The prices-paid index eased to 73.0 from 74.0 but remains extremely elevated, registering its second-highest reading since mid-2022.
Earlier this week we got our last piece of September employment data with the Job Openings and Labor Turnover Survey. Job openings rose to 7.5 million, above expectations of 7.2 million, showing labor demand remains healthy. Meanwhile, the layoff rate was unchanged at 1.0%, while the quits rate increased from 1.9% to 2.1%, suggesting workers may be becoming somewhat more confident in their ability to leave their current jobs.
Attention now turns to Friday’s October jobs report. Today, the ADP National Employment Report showed private employers added 86k jobs. The official BLS report is due Friday, with economists expecting roughly 65k jobs to be added to non-farm payrolls, while the unemployment rate is expected to remain unchanged at 4.2%. September payroll growth was just 29k.
Looking ahead to next week, we’ll get October inflation data, which will be another important piece of the puzzle for the Fed ahead of its December meeting. October CPI is scheduled for November 10 and will be the last CPI report available before the Fed’s December 9 decision.
Treasury rates moved lower over the past month, particularly in the intermediate and longer portions of the curve. The 2-year Treasury fell about 24 basis points to 4.59%, while the 5- and 10-year yields declined roughly 35 basis points. The very front end remained relatively stable, producing a flatter curve. Even after the rally, however, Treasury yields remain considerably higher than they were a year ago.
The next Fed meeting is still a little more than a month away, giving policymakers plenty of economic data to study between now and then. We’ll also get more fallout from the election and a better understanding of Democrats’ legislative priorities. With growth remaining solid and inflation pressures still elevated, the debate heading into December will continue to revolve around whether the Fed needs to keep rates level or tighten further.
About Scott McIntyre, CFA
As HilltopSecurities Asset Management’s Co-Head of Investment Management, Scott McIntyre specializes in investment management services and is responsible for the management, oversight and trade supervision of more than $30 billion in institutional fixed income assets for HilltopSecurities’ public sector municipal clients. Scott also provides investment advice and consulting, reviews local government investment policies, formulates overall investment strategies, evaluates account performance and oversees the day-to-day operations. He is a member of the Chartered Financial Analyst (CFA) Institute and a CFA Charterholder, a two-term advisor to the GFOA Treasury and Investment Management (TIM) committee, a Registered Investment Advisor, and holds FINRA Series 7, 24, 63, and 65 licenses.
About Greg Warner, CTP
As HilltopSecurities Asset Management’s Co-Head of Investment Management, Greg Warner specializes in investment management services and is responsible for the management and oversight of more than $30 billion in institutional fixed income assets for HilltopSecurities’ public sector municipal clients. Greg coordinates all client services and portfolio management duties, including security evaluation and portfolio analysis, trading, investment reporting, board presentations, and monitoring of broker-dealer relationships. He is an advisory committee member to the Texas Association of Counties, a member of the Government Treasurers’ Organization of Texas (GTOT), a Registered Investment Advisor, a Certified Treasury Professional (CTP) and holds FINRA Series 7, 63, and 65 licenses.
About Matt Harris, CFA
As HilltopSecurities Asset Management’s Senior Portfolio Advisor, Matt Harris specializes in investment management services for public sector municipal clients. He developed his experience in the banking industry, supporting balance sheet management, interest rate risk analysis, liquidity planning, and investment strategy implementation. At HilltopSecurities, he works closely with clients to develop and implement customized investment strategies, oversees account documentation and reporting, and assists clients with the public funds depository review process, including competitive RFP evaluations. Harris is a member of the CFA Institute and a CFA Charterholder, a Registered Investment Advisor, and holds FINRA Series 7, 63, and 66 licenses.
The paper/commentary was prepared by HilltopSecurities Asset Management (HSAM). It is intended for informational purposes only and does not constitute legal or investment advice, nor is it an offer or a solicitation of an offer to buy or sell any investment or other specific product. Information provided in this paper was obtained from sources that are believed to be reliable; however, it is not guaranteed to be correct, complete, or current, and is not intended to imply or establish standards of care applicable to any attorney or advisor in any particular circumstances. The statements within constitute the views of HTS and/or HSAM as of the date of the document and may differ from the views of other divisions/departments of Hilltop Securities Inc. and its affiliates. In addition, the views are subject to change without notice. This paper represents historical information only and is not an indication of future performance. Sources available upon request.
HilltopSecurities Asset Management is an SEC-registered investment advisor. Hilltop Securities Inc. is a registered broker-dealer, registered investment adviser and municipal advisor firm that does not provide tax or legal advice. HTS and HSAM are wholly owned subsidiaries of Hilltop Holdings, Inc. (NYSE: HTH) located at 717 N. Harwood St., Suite 3400, Dallas, Texas 75201, (214) 859-1800, 833-4HILLTOP.