In the good old days, the economy was pumped up in due time so that it was ‘not too hot, not too cold’ during the US election. The US Federal Reserve (Fed) stayed out of the picture and financial markets treaded water during the hot phase of campaigning. Now, in autumn 2024, it seems that the Inflation Reduction Act was a year too early to turbo-charge the economy. It is therefore running out of steam, according to the latest US macroeconomic data points. The Fed also missed the window of opportunity to cut its interest rates earlier this year as inflation prints fell. So now it is perceived to be behind the curve and will have to start cutting next week.

US elections: Improved prospects for the Democrats 

With Vice President Harris as the new Democratic nominee, the race for presidency is more competitive again. With just two months to go until the 2024 US elections, excitement is building up and the impact on financial markets is expected to increase. 

The race for the presidency remains tight, but with the resignation of Joe Biden as the Democratic candidate and the nomination of Vice President Kamala Harris, which has increased optimism among Democratic voters, the odds have shifted back in favour of the Democrats. Polls show that the odds of either candidate winning the presidency are now more even. That said, while the odds of winning the House of Representatives remain fairly even, the Democrats need to defend almost twice as many seats in the Senate than the Republicans.

A Trump sweep remains the most significant outcome for the economy, as tax cuts would be extended, boosting growth, inflation, and interest rates, but softening the US dollar through weakening financial institutions and rising fiscal risks. The expiration of all or most of the tax cuts under a Harris sweep and any other split Congress scenario leads to our baseline scenario of subdued growth and lower rates over the next two years. While the markets wait in anticipation to see what will happen in the US elections, Mexico’s new congress took office last week bringing with it some controversial reforms.

Mexico: Controversial reforms move forward

Mexico’s new congress took office last week and approved the judicial reform in the Lower House. More controversial reforms are on the table, which are likely to maintain volatility in markets over the coming weeks and could deteriorate the country’s long-term investment outlook. 

The reform raised concerns among investors and critics, as it aims to elect all judges, including those on the Supreme Court, by popular vote. The judiciary reform is particularly controversial because the Supreme Court has blocked several of President López Obrador’s key initiatives, including reforms to increase state control over the electricity and energy sectors, favouring state-owned companies over private investments. Critics worry that the reform could reduce the Court’s independence and increase the power of the executive branch, making it easier for the president to implement policies without judicial obstacles.

The judicial reform is just one of 17 controversial reforms on the agenda, which could contribute to a deteriorating long-term investment outlook for Mexico. The impact so far has been more pronounced in the currency market, with the MXN down -14% against the USD since the June elections. More headwinds stemming from fiscal concerns and slowing growth as well as potential US tariff hikes after a Trump win should continue to add pressure on the MXN. 

However, there is a potential silver lining on the horizon with the upcoming inauguration of President-elect Sheinbaum in October. Known for her pragmatic approach and openness to private-sector investments, there is hope that the implementation of President López Obrador’s reforms, particularly in the elaboration of secondary laws, may be more moderate than currently feared. 

What does this mean for investors?

For investors, the economy may be an uncomfortable experience until things fall into place: a new rate-cutting cycle as of next week, then a US election result. Before that, we will continue to see how things play out in Mexico and remain Neutral on Mexican equities on the back of double-digit earnings growth for the next two years and the potential of a moderation of the legislative agenda under President-elect Sheinbaum.