| Good morning. The momentum in stocks continues, markets get ready for a busy day of data and bond investors prepare for a potential Donald Trump return. Here's what traders are talking about. — David Goodman Want to receive this newsletter in Spanish? Sign up to get the Five Things: Spanish Edition newsletter. European stocks rose and US futures were little changed after another record close for both the S&P 500 and Nasdaq on Tuesday. The records — the S&P 500's 32nd this year — came on optimism about US interest-rate cuts after Federal Reserve Chair Jerome Powell said inflation is getting back on a downward path. There's a flurry of data to get through today before markets close for the July 4 holiday. The ADP's employment report is probably the highlight — especially after data Tuesday showed US job openings unexpectedly rose in May — while other releases cover areas including jobless claims, durable goods and services. Meanwhile, the Fed will also release minutes of its June meeting. The combination of the data and the minutes will be particularly interesting given economists and some Federal Reserve officials are increasingly on alert for signs the labor market is losing steam. Looking further ahead, traders in the $27 trillion Treasury market are betting on higher long-term bond yields as Wall Street starts to adjust for Donald Trump's potential return to the White House. Investors have been buying shorter-maturity notes and selling longer-term ones after Trump came out ahead of President Joe Biden in the first presidential debate. "It's still too soon to fully price in an election outcome — but probably not too early to leg into it," said Subadra Rajappa, head of US rates strategy at Societe Generale SA. It's the middle of a big week for elections in Europe, with the UK voting tomorrow and another round of French polls on Sunday. The latter remains the bigger worry for traders, although France's benchmark CAC 40 index rose Wednesday amid signs Marine Le Pen's far-right group faces an uphill climb to achieve an absolute majority. Still, Rabobank says the prospect of a hung parliament on Sunday shouldn't cheer investors given that it would mean budget gridlock. This is what's caught our eye over the past 24 hours. Good morning. On the prediction market PredictIt, President Joe Biden and Vice President Kamala Harris are now virtually tied in their odds of being the next Democratic Presidential nominee (HT: Michael McDonough.) Prediction markets like PredictIt, PolyMarket, and others are definitely having a moment right now in the discourse, with the odds of various electoral outcomes being posted and talked about all time. I've written about these markets a few times in the past so I'll just reiterate briefly what I think about them.
First, prediction markets, where people bet on the outcomes of specific events, are nothing new in finance. Things like the Treasury market, or other interest-rate linked instruments are prediction markets. Yes of course, macro-economic trends can influence their pricing, but ultimately what people are betting on is the decisions that get made by 12 voting members over various timeframes. If you're betting on how people vote, it's identical conceptually to the ones listed above. Second, I've never loved the term prediction markets, because it often leads people down an avenue of trying to assess whether the market was accurate, or right or wrong, or whether the predictions turned out to be correct, and then assessing them this way. But I think this is only so useful. These markets are often dramatically repricing, so the degree to which they are "correct" is often a matter of timeframe. Again, same with Treasuries. Two-year yields, which are basically a reflection of Fed policy expectations over the next two years, rose a lot at the start of Q1 2024 as inflation came in hotter than expected, and expectations for the Fed cutting cycle kept being pushed out. The market isn't some all-knowing oracle, even if people love to valorize the so-called wisdom of crowds. Sometimes crowds can be wise, I suppose. But, you know, the madness of crowds is also a thing. What prediction markets do well, however, is put a price on conventional wisdom. When people watched the debate the other night, and generally assessed that President Biden did terribly, a bunch of people immediately thought "Wow, he might really have to drop out" and his odds of being the nominee started to plunge. Everyone had the same thought at the same time, and the market reflected that. What's useful here is that we can now put a number on what people are thinking right now. It's one thing to say "Wow, Biden might really have to drop out now," but does that mean he has a 20% chance of dropping out (still very high for an incumbent candidate) or a 50% chance? There's a big difference between these numbers, but it's not normally captured that cleanly in pundit language. So now we have a price. And now that there's a price you have something against which to benchmark your own views. If you're a participant in traditional markets, say, trading shares of Tesla or companies highly exposed to tariffs, or companies that might benefit from a steeper yield curve, this is useful. Suddenly conventional wisdom can be priced, and theoretically plugged in as an assumption into some larger model. Of course these markets are still young, volatile and (relatively) illiquid. There are frequently price discrepencies across different platforms and to some extent within the platforms themselves. But for pivotal questions in fast-moving news stories that have costly ramifications (depending on how they play out,) I think they're a pretty useful addition to our information diet. Joe Weisenthal is the co-host of Bloomberg's Odd Lots podcast. Follow him on X @TheStalwart Like Bloomberg's Five Things? Subscribe for unlimited access to trusted, data-based journalism in 120 countries around the world and gain expert analysis from exclusive daily newsletters, The Bloomberg Open and The Bloomberg Close. | 
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