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Summary
- Following President Joe Biden’s exit from the presidential race, former president Donald Trump’s odds of winning have fallen but remain well above 50%.
- Vice President Kamala Harris seems the most likely nominee based on party endorsement and campaign finance considerations.
- While Harris could well be a more electable candidate than Biden, she still faces an uphill battle.
Market Implications
- 10 year yields could fall on the news.
- I continue to expect one 2024 Fed cut against 2.5 cuts currently priced in.
Trump Still Leading
On Friday, Bilal flagged the risk Biden could withdraw over the weekend (this was my 2024 Grey Swan).
After Biden stepped down yesterday, Trump’s betting odds are 61%, still well above 50% but down from 69% on Monday before rumors of a Biden exit intensified (Chart 1).
The lower odds reflect the risk of the Democrats choosing a more electable candidate than Biden. At the same time, Trump’s still comfortable margin reflects uncertainty on process and outcome of the nomination as well as that the Democrats underlying difficulties have not changed by Biden’s withdrawal.
Harris Most Likely to Succeed Biden as Nominee
As of this writing, betting markets give Harris an 82% chance of getting the nomination, well above the other contenders (Chart 2). This reflects party support as well as campaign finance considerations.
Party support for Harris is building up. She is Biden’s designated successor. The Clintons have already endorsed her, as well as the House and Senate progressives, important donors, and PACs. Most importantly, potential competitors Governors Josh Shapiro, Gavin Newsom, and Transport Secretary Pete Buttigieg have also endorsed her. Governor Gretchen Whitmer is expected to do so today. Harris, though, still has to get endorsements from former president Barack Obama, former House Speaker Nancey Pelosi, Senate Majority leader Chuck Schumer and House minority leader Jeffries.
Picking Harris as nominee would greatly simplify campaign finance issues created by Biden’s exit. At end-June the Biden campaign had $96mn in cash, which could be easily transferred to Harris since the money was raised for the Biden-Harris campaign.
Should the Democrats pick another nominee, the funds could not be easily transferred. Instead, they may have to be transferred to the Democratic National Committee that would decide how to allocate the money. In such an instance, there is a risk the DNC could be legally compelled to return the donations.
In practice, the Democrats could officially select Harris either before the convention (they were planning to officially anoint Biden on 7 August), or at the convention that starts on 19 August. Biden’s delegates have officially become uncommitted but would likely support the candidate agreed upon by the party leadership.
Democrats Still Face an Uphill Battle
Even after Biden’s exit, the Democrats face an uphill battle. Betting markets only give Harris a 40% chance of winning the White House. Democrats remain divided on a number of issues. For instance, today’s visit by Israeli President Benjamin Netanyahu will expose the foreign policy divisions of the Democrats.
In addition, Trump’s choice of JD Vance as vice president could steal the Democrats’ thunder. Vance is a populist. His acceptance speech included, ‘Jobs were sent overseas, and our children were sent to war’, ‘America’s ruling class wrote the checks, and communities like mine paid the price’, which echoes Bernie Sanders’ populism. But Sanders’ populism is precisely what a centrist nominee like Harris is meant to steer clear of.
Market Consequences
As Bilal pointed out on Friday, 10yr yields have been most sensitive to campaign events so far so Biden’s exit could see yields fall.
Longer term, a lower risk of a Trump win would lower 2025 inflationary risks and on the margin leave the Fed more open to easing policy, though my base case remains one 2024 cut at the November or December FOMCs.