Over 10,000 athletes flocked to the French capital to compete against each other, giving the city some respite from the political turmoil surrounding it. Not even the disruption caused by the railway sabotage could derail a successful start to the Paris Olympics.

However, you can’t talk about political turmoil without looking at the US. The race for the US presidency is back on now that President Joe Biden has dropped out. The (presumed) Democratic candidate Kamala Harris is already making headlines with a remarkable fundraising campaign. Markets are trying to gauge not only her chances against Trump, but also whether a Harris presidency would mean the continuation of Bidenomics. Only future announcements will tell. In the meantime, we have the US Federal Reserve meeting this week, and while there is no change in policy expected, we do see bullish rate cuts on the horizon.

US: Bullish rate cuts are coming

The US Federal Reserve is preparing to ease monetary policy but sees no urgency to do so while growth remains solid. We expect the Fed to gradually cut rates in response to lower inflation, starting at its September meeting, while keeping rates on hold at the July meeting. Easing in response to lower inflation is a positive signal for financial markets.

The US reported better-than-expected GDP growth last week, largely driven by solid growth in domestic demand, including private and public consumption and business investment. An inventory build-up provided a further growth boost in the second quarter. Given the still-solid US demand backdrop, the path of inflation remains a key consideration for the Fed rate decision.

We expect the FOMC will want further evidence that inflation is moderating before cutting rates. We thus continue to expect a first rate cut at the September FOMC meeting and another in December, skipping the November meeting in between.

Such gradual rate cuts are contrary to the historical norm. Normally, the Fed starts to cut rates due to a deteriorating economic environment. In such cases, it needs to act quickly and sometimes quite boldly. With economic growth still solid, we expect the Fed to cut rates in response to lower inflation. Failure to cut in response to falling inflation would mean that real interest rates would rise, further tightening monetary policy.

Latin America: Resilient amidst volatility

Political dynamics have been the most dominant driver for financial assets in the region in recent months. However, the outlook on economic growth, inflation, and support of first interest rate cuts by the US Federal Reserve support our favourable stance on Latin American equities and hard-currency debt.

Following a calm first quarter in 2024, fiscal and political worries have emerged across the region, leading to a broad deterioration in investor sentiment, a higher risk premium, and increased volatility for local assets. Currencies have come under increased downward pressure since April, and political noise is unlikely to abate going forward, with municipal elections in Brazil and Chile in October as well as the US elections in November.

The rising likelihood of a ‘Republican sweep’, whereby the Republican Party wins the presidency and secures a majority in Congress, could add depreciation pressure on Latin American currencies. However, economic growth in the region remains remarkably resilient and has been better than expected in most countries, supported by fiscal stimulus, monetary easing, and favourable terms of trade. Moreover, inflation continues to be on a healthy downward trend, albeit at a slower pace. As a result, most central banks in the region have slowed or paused their easing cycle to tame inflation and keep inflation expectations anchored.

What does this mean for investors?

In the US, though disinflation continues, the economy is still holding up very well, as recently reflected in the recent domestic product figures. As such, we expect a similar approach to that of the European Central Bank earlier this year, by not cutting interest rates further at every meeting after the first rate cut.

In Latin America, we believe the challenging fiscal and political backdrop has been fully factored into the market. In addition, first rate cuts in the US as early as September may trigger a crucial move for risk assets in the region. We therefore maintain our Overweight rating for Latin American stocks, and for Latin American hard-currency debt due to still-resilient growth, lower inflation, and expected support from the Fed’s easing cycle.